Patterns of Foreign Exchange Intervention Under Inflation Targeting

30 Pages Posted: 30 Jun 2020

See all articles by Gustavo Adler

Gustavo Adler

International Monetary Fund (IMF) - Research Department

Kyun Suk Chang

International Monetary Fund (IMF)

Zijiao Wang

International Monetary Fund (IMF)

Date Written: May 2020

Abstract

The paper documents the use of foreign exchange intervention (FXI) across countries and monetary regimes, with special attention to its use under inflation targeting (IT). We find significant differences between advanced and emerging market economies, with the former group conducting FXI limitedly and broadly symmetrically, while the use of this policy instrument in emerging market countries is pervasive and mostly asymmetric (biased towards purchasing foreign currency, even after taking into account precautionary motives). Within emerging markets, the use of FXI is common both under IT and non-IT regimes. We find no evidence of FXI being used in response to inflation developments, while there is strong evidence that FXI responds to exchange rates, indicating that IT central banks in EMDEs have dual inflation/exchange rate objectives. We also find a higher propensity to overshoot inflation targets in emerging market economies where FXI is more pervasive.

Keywords: Nominal effective exchange rate, Exchange rate policy, Central banks, Foreign exchange intervention, Exchange rate management, inflation targeting, exchange rate, WP, inflation expectation, inflation target, domestic currency, full sample

JEL Classification: F31, E63, F53, O24, E52, G21, E01

Suggested Citation

Adler, Gustavo and Chang, Kyun Suk and Wang, Zijiao, Patterns of Foreign Exchange Intervention Under Inflation Targeting (May 2020). IMF Working Paper No. 20/69, Available at SSRN: https://ssrn.com/abstract=3638517

Gustavo Adler (Contact Author)

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

700 19th Street NW
Washington, DC 20431
United States

Kyun Suk Chang

International Monetary Fund (IMF) ( email )

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

Zijiao Wang

International Monetary Fund (IMF) ( email )

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

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