Central bank balance sheets under foreign exchange accumulation: insights from endogenous money theory and monetary policy implementation

Bozhinovska, Simona

Central bank balance sheets under foreign exchange accumulation: insights from endogenous money theory and monetary policy implementation

Abstract: The present article proposes to draw on the recent experiences of many central banks of advanced economies and the evolution of their operational frameworks in the new context of increased domestic liquidity, when analysing the operations of central banks that engage in exchange rate management and increase their official foreign reserves as a result. It argues that the theoretical literature on endogenous money set within the context of an open economy with an exchange rate objective needs to be amended to account for such developments, as it would be entirely possible for a central bank that accumulates substantial foreign reserves to adopt a floor system and thus maintain a near-perfect control over its policy interest rate without the need for any compensating measure. On the grounds of the reverse causation argument, establishing a direct link between the foreign reserves and the monetary base should not entail any quantitative effect on other economic variables.

Keywords: central bank balance sheets; endogenous money theory; foreign exchange accumulation; monetary policy implementation (search for similar items in EconPapers)
Date: 2023-02-22
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Persistent link: https://EconPapers.repec.org/RePEc:hal:cepnwp:hal-04001390

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