Fear (no more) of floating: Asset purchases and exchange rate dynamics

Yasin Mimir and Enes Sunel

Journal of Economic Dynamics and Control, 2025, vol. 177, issue C

Abstract: We provide a theory on currency dynamics, capital flows and conditions for emerging-market economy central bank asset purchases to leave room for maneuver for conventional monetary policy. Local-currency asset purchases ease financial conditions and boost banks' foreign borrowing capacity. Therefore, they curb the financial amplification of government bond sell-off shocks by mitigating private sector capital outflows and the accompanying exchange rate depreciation. The resulting limited rise in inflation reduces the pro-cyclicality of conventional monetary policy. Our framework sheds light on stable exchange rate dynamics observed after the unprecedented asset purchase announcements in emerging-market economies during the COVID-19 crisis.

Keywords: Asset purchases; Exchange rate; Conventional monetary policy (search for similar items in EconPapers)
JEL-codes: E62 E63 G21 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Fear (no more) of Floating: Asset Purchases and Exchange Rate Dynamics (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:177:y:2025:i:c:s0165188925001022

DOI: 10.1016/j.jedc.2025.105136

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