Countering Appreciation Pressure with Unconventional Monetary Policy: The Role of Financial Frictions

Nicole Aregger and Jessica Leutert
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Nicole Aregger: UBS

International Journal of Central Banking, 2023, vol. 19, issue 4, 251-337

Abstract: In a simple two-country framework with imperfect financial intermediation we analyze and compare the effectiveness of two unconventional monetary policy measures: foreign exchange interventions and credit easing. Central bank interventions only have real effects when banks are financially constrained. For a country facing excess demand for its bonds, we study three external sources of appreciation pressure: increased financial frictions in the international credit market, an increase in capital inflows, and increased financial frictions in the foreign investment market. Only in the first two cases, foreign exchange interventions can reverse the appreciation and the resulting misallocation of capital. Under certain conditions, credit easing is a substitute for foreign exchange interventions.

JEL-codes: E52 F31 F32 F41 G15 G20 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2023:q:4:a:7

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