Foreign Exchange Intervention with UIP and CIP Deviations: The Case of Small Safe Haven Economies

Philippe Bacchetta, Kenza Benhima and Brendan Berthold

No 18469, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We examine the welfare-based opportunity cost of foreign exchange (FX) intervention when both CIP and UIP deviations are present. We consider a small open economy that receives international capital flows through constrained international financial intermediaries. Deviations from CIP come from limited arbitrage or through a convenience yield, while UIP deviations are also affected by risk. We show that the sign of CIP and UIP deviations may differ for safe haven countries. We find that there may be a benefit, rather than a cost, of FX reserves if international intermediaries value the safe haven properties of a currency more than domestic households. We show that this has been the case for the Swiss franc and the Japanese Yen. We examine the optimal policy of a constrained central bank planner in this context.

Date: 2023-09
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP18469 (application/pdf)

Related works:
Working Paper: Foreign Exchange Intervention with UIP and CIP Deviations: The Case of Small Safe Haven Economies (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:18469

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP18469

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().