Exchange Rate Policies at the Zero Lower Bound

53 Pages Posted: 27 Mar 2017

See all articles by Manuel Amador

Manuel Amador

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Luigi Bocola

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Fabrizio Perri

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Multiple version iconThere are 2 versions of this paper

Date Written: March 2017

Abstract

We study the problem of a monetary authority pursuing an exchange rate policy that is inconsistent with interest rate parity because of a binding zero lower bound constraint. The resulting violation in interest rate parity generates an inflow of capital that the monetary authority needs to absorb by accumulating foreign reserves. We show that these interventions by the monetary authority are costly, and we derive a simple measure of these costs: they are proportional to deviations from the covered interest parity (CIP) condition and the amount of accumulated foreign reserves. Our framework can account for the recent experiences of “safe-haven” currencies and the sign of their observed deviations from CIP.

Suggested Citation

Amador, Manuel and Bianchi, Javier and Bocola, Luigi and Perri, Fabrizio, Exchange Rate Policies at the Zero Lower Bound (March 2017). NBER Working Paper No. w23266, Available at SSRN: https://ssrn.com/abstract=2941244

Manuel Amador (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Luigi Bocola

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Fabrizio Perri

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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