SFX Interventions, Financial Intermediation, and External Shocks in Emerging Economies
Alex Carrasco Martinez,
David Florián and
Rafael Nivin ()
No 160, Working Papers from Peruvian Economic Association
In this document, we study the role of sterilized foreign exchange (SFX) interventions as an additional monetary policy instrument for emerging market economies in response to external shocks. We develop a model in order to analyze SFX interventions as a balance sheet policy induced by a financial friction in the form of an agency problem between banks and depositors. The severity of the bank’s agency problem depends directly on a measure of currency mismatch at the bank level. Moreover, credit and deposit dollarization coexists in equilibrium as endogenous variables. In this context, SFX interventions can lean against the response of the bank’s lending capacity and ultimately the response of real variables by moderating the response of the exchange rate. Furthermore, we take the model to data by calibrating it to replicate some financial steady-state targets for the Peruvian banking system as well as matching the impulse responses of the macroeconomic model to the impulse responses implied by an SVAR model. Our results indicate that SFX interventions successfully reduce GDP and investment volatility by about 6% and 14%, respectively, when compared to a flexible exchange rate regime. Moreover, SFX interventions reduce the response of GDP to foreign interest rate and commodity price shocks by around 11 and 22 percent, respectively. Hence, this policy produces significant welfare gains when responding to external shocks: if the Central Bank does not intervene in the Forex market in the face of external shocks, there would be a welfare loss of 1.1%.
Keywords: Sterilized Forex Interventions; External Shocks; Financial Cycle; Dollarization; Monetary Policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Working Paper: SFX Interventions, Financial Intermediation, and External Shocks in Emerging Economies (2019)
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:apc:wpaper:160
Access Statistics for this paper
More papers in Working Papers from Peruvian Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Nelson Ramírez-Rondán ().