scholarly journals Capital Flows and Foreign Exchange Intervention

2019 ◽  
Vol 11 (2) ◽  
pp. 127-170 ◽  
Author(s):  
Paolo Cavallino
Keyword(s):  
Financial Markets ◽  
Foreign Exchange ◽  
Open Economy ◽  
Capital Flows ◽  
Small Open Economy ◽  
Optimal Size ◽  
Economy Model ◽  
Foreign Exchange Intervention ◽  
Optimal Intervention ◽  
Intervention Policy

I consider a small open economy model where international financial markets are imperfect and the exchange rate is determined by capital flows. I use this framework to study the effects of portfolio flow shocks, derive the optimal foreign exchange intervention policy, and characterize its interaction with monetary policy. I derive the optimal intervention rule in closed form as a function of three implicit targets. Finally, using Swiss data, I estimate the model to quantify the inefficiencies generated by capital flow shocks and the optimal size of the intervention. (JEL E44, E52, E63, F31, F32, F33, F41)

scholarly journals A Theory of Foreign Exchange Interventions

2021 ◽  
Author(s):  
Sebastián Fanelli ◽  
Ludwig Straub
Keyword(s):  
Exchange Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Open Economy ◽  
Small Open Economy ◽  
Bond Markets ◽  
Pecuniary Externality ◽  
Optimal Intervention ◽  
The Exchange Rate ◽  
Intervention Policy

Abstract We study a real small open economy with two key ingredients (1) partial segmentation of home and foreign bond markets and (2) a pecuniary externality that makes the real exchange rate excessively volatile in response to capital flows. Partial segmentation implies that, by intervening in the bond markets, the central bank can affect the exchange rate and the spread between home- and foreign-bond yields. Such interventions allow the central bank to address the pecuniary externality, but they are also costly, as foreigners make carry trade profits. We analytically characterize the optimal intervention policy that solves this trade-off: (1) the optimal policy leans against the wind, stabilizing the exchange rate; (2) it involves smooth spreads but allows exchange rates to jump; (3) it partly relies on “forward guidance,” with non-zero interventions even after the shock has subsided; (4) it requires credibility, in that central banks do not intervene without commitment. Finally, we shed light on the global consequences of widespread interventions, using a multi-country extension of our model. We find that, left to themselves, countries over-accumulate reserves, reducing welfare and leading to inefficiently low world interest rates.

scholarly journals Shocks Matter

2020 ◽  
Vol 20 (97) ◽  
Author(s):  
Ruy Lama ◽  
Juan Medina
Keyword(s):  
Open Economy ◽  
Capital Flows ◽  
Small Open Economy ◽  
Policy Instruments ◽  
Output Volatility ◽  
Macroprudential Policy ◽  
Foreign Exchange Intervention ◽  
Leading Role ◽  
Interest Rate Shocks ◽  
Capital Outflows

We study the optimal management of capital flows in a small open economy model with financial frictions and multiple policy instruments. The paper reports two main findings. First, both foreign exchange intervention (FXI) and macroprudential polices are tools complementary to the monetary policy rate that can largely reduce inflation and output volatility in a scenario of capital outflows. Second, the optimal policy mix depends on the underlying shock driving capital flows. FXI takes the leading role in response to foreign interest rate shocks, while macroprudential policy becomes the prominent tool for domestic risk shocks. These results highlight the importance of calibrating the use of multiple instruments according to the underlying shocks that induce shifts in capital flows.

scholarly journals Productivity Growth and Capital Flows: The Dynamics of Reforms

2017 ◽  
Vol 9 (3) ◽  
pp. 147-185 ◽  
Author(s):  
Francisco J. Buera ◽  
Yongseok Shin
Keyword(s):  
Financial Markets ◽  
Open Economy ◽  
Capital Flows ◽  
Large Scale ◽  
Small Open Economy ◽  
Economic Resources ◽  
Joint Dynamics ◽  
Capital Outflows ◽  
Investment Rates ◽  
Saving Rates

Why doesn't capital flow into fast-growing countries? Using a model with heterogeneous producers and underdeveloped domestic financial markets, we explain the joint dynamics of total factor productivity (TFP) and capital flows. When a large-scale economic reform removes preexisting idiosyncratic distortions in a small open economy, its TFP rises, driven by efficient reallocation of economic resources. At the same time, because of the domestic financial frictions, saving rates surge but investment rates respond only with a lag, resulting in capital outflows. The dynamics of TFP, capital flows, and idiosyncratic distortions in the model are consistent with what is observed during growth acceleration episodes, which often follow large-scale economic reforms. (JEL E21, E22, F21, F32, O16, O47)

scholarly journals Governance Aspect of Foreign-Exchange Policy in Indonesia

2015 ◽  
Author(s):  
Ferry Syarifuddin
Keyword(s):  
Foreign Exchange ◽  
Capital Flows ◽  
Good Governance ◽  
System Stability ◽  
Policy Mix ◽  
Macroprudential Policy ◽  
Foreign Exchange Intervention ◽  
Exchange Policy ◽  
Intervention Policy ◽  
Price Instability

While most recent central bank’s foreign-exchange interventions have been directed at mitigating speculative currency pressures and reducing risks to price instability, as well as curbing volatility in capital flows, the good governance implementation plays significant role in making the foreign-exchange operations done in efficient and effective way. For Bank Indonesia, the implementation of foreign exchange policy strategy followed governance principle is essential and geared toward price and financial system stability. In practice, the objective is reached through foreign-exchange intervention policy combined with other monetary and macroprudential policy called policy mix.

Financial openness, bank capital flows, and the effectiveness of macroprudential policies

2021 ◽  
pp. 1-32
Author(s):  
Hao Jin ◽  
Chen Xiong
Keyword(s):  
Open Economy ◽  
Capital Flows ◽  
Open Economies ◽  
Small Open Economy ◽  
Empirical Support ◽  
Bank Capital ◽  
Macroprudential Policy ◽  
Funding Sources ◽  
Macroprudential Policies ◽  
Dynamic Stochastic

Abstract This paper quantitatively examines the macroeconomic and welfare effects of macroprudential policies in open economies. We develop a small open economy dynamic stochastic general equilibrium (DSGE) model, where banks choose their funding sources (domestic vs. foreign deposits) and are subject to financial constraints. Our model predicts that banks reduce leverage in response to a macroprudential policy tightening, but increasingly rely on foreign funding. This endogenous shifts of funding composition significantly undermine the stabilizing effect and welfare gains of macroprudential policies. Our results also suggest macroprudential policies are less effective in financially more open economies, and optimal policy should take capital flows into consideration. Finally, we find empirical support for the model predictions in a group of developing and emerging economies.

scholarly journals Evaluating an estimated new Keynesian small open economy model

2008 ◽  
Vol 32 (8) ◽  
pp. 2690-2721 ◽  
Author(s):  
Malin Adolfson ◽  
Stefan Laséen ◽  
Jesper Lindé ◽  
Mattias Villani
Keyword(s):  
Open Economy ◽  
Small Open Economy ◽  
New Keynesian ◽  
Economy Model
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