THE SCOPE FOR FOREIGN EXCHANGE MARKET INTERVENTIONS

Peter Bofinger ()
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Peter Bofinger: University of Wuerzburg, Department of Economics, Sanderring 2, 97070 Wuerzburg, Germany

Journal of International Commerce, Economics and Policy (JICEP), 2012, vol. 03, issue 03, 1-28

Abstract: The discussion on exchange rate policy is dominated by the so-called "impossible trinity". In this paper, a strategy of managed floating is developed that allows one to transform the "impossible trinity" into a "possible trinity". If a central bank targets an exchange rate path which is determined by uncovered interest parity (UIP), it can at the same time set its policy rate autonomously. As a UIP path removes the incentives for carry-trade, it is also compatible with capital mobility. The approach can be used unilaterally to prevent carry trade as a central bank can always prevent an appreciation of its currency. But it can also be applied bilaterally or multilaterally. Successful examples are the European Monetary System and the exchange rate policy of Slovenia before its EMU membership.

Keywords: International monetary system; managed floating; foreign exchange market interventions; uncovered interest parity; carry trade; inflation targeting; F31; F32; F33 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1142/S1793993312500184

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