 External shocks and FX intervention policy in financially dollarized economiesAlex Carrasco and David Florián Hoyle Journal of Macroeconomics, 2025, vol. 84, issue C Abstract: We examine the role of sterilized FX interventions as a monetary policy tool in response to external shocks for dollarized emerging market economies. Our model highlights an agency problem that limits banks’ ability to secure funds in both domestic and foreign currencies, with its intensity linked to currency mismatches in the banking sector. This leads to endogenous deviations from the standard UIP condition, resulting in a non-neutral FX intervention policy. Sterilized FX interventions stabilize financial conditions not only by stabilizing real exchange rates but also by acting as a balance sheet policy that directly influences credit supply. Our quantitative analysis shows that FX policy rules that counteract exchange rate deviations reduce volatility in interest rate spreads including UIP deviations, credit, investment, and output, leading to significant welfare improvements compared to a flexible exchange rate regime. Keywords: FX intervention; External shocks; Monetary policy; Financial frictions; Dollarization (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:84:y:2025:i:c:s0164070425000096 DOI: 10.1016/j.jmacro.2025.103672 Access Statistics for this article Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos More articles in Journal of Macroeconomics from Elsevier |
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