Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework

Jaromir Benes, Andrew Berg (), Rafael Portillo and David Vavra

No 2013/011, IMF Working Papers from International Monetary Fund

Abstract: We study a wide range of hybrid inflation-targeting (IT) and managed exchange rate regimes, analyzing their implications for inflation, output and the exchange rate in the presence of various domestic and external shocks. To this end, we develop an open economy new-Keynesian model featuring sterilized interventions in the foreign exchange (FX) market as an additional central bank instrument operating alongside the Taylor rule, and affecting the economy through portfolio balance sheet effects in the financial sector. We find that there can be advantages to combining IT with some degree of exchange rate management via FX interventions. Unlike "pure" IT or exchange rate management via interest rates, FX interventions can help insulate the economy against certain shocks, especially shocks to international financial conditions. However, managing the exchange rate through FX interventions may also hinder necessary exchange rate adjustments, e.g., in the presence of terms of trade shocks.

Keywords: WP; monetary policy; managed float; exchange rate intervention; Sterilized FX interventions; emerging markets; new-Keynesian economics; exchange rate targeting; corridor simulation; interest rate rule; exchange rate corridor; interest rate instrument; exchange rate volatility; exchange rate depreciation; exchange rate market; exchange rate movement; interest rate shock; interest rate premium; Exchange rates; Exchange rate arrangements; Central bank policy rate; Real exchange rates; Global; Eastern Europe (search for similar items in EconPapers)
Pages: 43
Date: 2013-01-14
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Citations: View citations in EconPapers (35)

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Journal Article: Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework (2015)
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