Winners and losers of central bank foreign exchange interventions
Economic Modelling, 2021, vol. 94, issue C, 748-767
Interventions in foreign exchange markets are indispensable for most central banks and recent years have witnessed an increase in their frequency and magnitude. However, little is known about their implications on agents’ welfare. This paper investigates the topic by employing a small open economy DSGE model with savers and borrowers in both local and foreign currencies, where the central bank intervenes to smooth out exchange rate volatility by changing its foreign reserve. Interventions occur following the foreigners’ decision to sell (or buy) domestic assets, thus weakening (or strengthening) the local currency. The model allows the disentanglement of welfare implications by type of agent and source of exchange rate imbalance, which is novel in the literature, providing useful insight for central bankers. The findings highlight the benefits of interventions in the case of foreign financial shocks, especially when the level of currency mismatch in the economy is high. However, when exchange rate disequilibrium stems from domestic developments, the intervention generates winners and losers.
Keywords: Foreign exchange intervention; Foreign currency loan; Welfare; DSGE; Agent heterogeneity (search for similar items in EconPapers)
JEL-codes: E52 F31 F41 G15 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:94:y:2021:i:c:p:748-767
Access Statistics for this article
Economic Modelling is currently edited by S. Hall and P. Pauly
More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().