Intervention Under Inflation Targeting--When Could it Make Sense?

23 Pages Posted: 6 Feb 2020

See all articles by David Hofman

David Hofman

International Monetary Fund (IMF)

Marcos Chamon

International Monetary Fund (IMF) - Research Department

Pragyan Deb

International Monetary Fund (IMF); London School of Economics & Political Science (LSE) - Financial Markets Group

Thomas Harjes

International Monetary Fund (IMF)

Umang Rawat

International Monetary Fund (IMF)

Itaru Yamamoto

International Monetary Fund (IMF)

Date Written: January 2020

Abstract

We investigate the motives inflation-targeting central banks in emerging markets may have for intervening in foreign exchange markets and evaluate the case for such interventions based on the existing literature. Our findings suggest that the rationale for interventions depends on initial conditions and country-specific circumstances. The case is strongest in the presence of large currency mismatches or underdeveloped markets. While interventions can have benefits in the short-term, sustained over time they could entrench unfavorable initial conditions, though more work is needed to establish this empirically. A first effort to measure the cost of interventions to the credibility of policy frameworks suggests that the negative impact may be smaller than often assumed-at least for the set of more sophisticated inflation-targeting emerging-market central banks considered here.

Keywords: Central banks, Exchange rate policy, Central bank policy, Exchange markets, Central banking and monetary issues, emerging markets, monetary and exchange rate policies, inflation targeting, foreign exchange intervention, capital flows, WP, EME, inflation target, policy instrument, exchange rate, targeter

JEL Classification: F21, F32, O24, E52, G21, F16, E01

Suggested Citation

Hofman, David and Chamon, Marcos and Deb, Pragyan and Harjes, Thomas and Rawat, Umang and Yamamoto, Itaru, Intervention Under Inflation Targeting--When Could it Make Sense? (January 2020). IMF Working Paper No. 20/9, Available at SSRN: https://ssrn.com/abstract=3533127

David Hofman (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Marcos Chamon

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-5867 (Phone)

Pragyan Deb

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Thomas Harjes

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Umang Rawat

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Itaru Yamamoto

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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