International Reserve Policy and the Effectiveness of Sterilized FX Intervention in Colombia

Abstract

Two FX policy issues are discussed based on the recent Colombian experience. First, the increased participation of foreign investors in local bond markets since 2014 induced a reassessment of international reserve adequacy. We present the resulting Liquidity Coverage Ratio-type methodology to evaluate adequacy, together with a brief description of the international reserves management strategy in Colombia. Second, we shed some light on the debate regarding the effectiveness of sterilized FX intervention, showing that exchange rate effects depend on the “flimsiness” of exchange rate expectations or their fundamental determinants. To support this, we provide empirical and theoretical evidence.

Full Publication: Reserve Management and FX Intervention

Keywords: sterilized FX intervention, international reserves, Colombia

JEL Classification: F31, E58