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Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework, Jaromir Benes, Andrew Berg, Rafael Portillo, David Vávra

We study a wide range of hybrid inflation-targeting (IT) and managed exchange rate regimes, analyzing their implications for inflation, output and the exchange rate in the presence of various domestic and external shocks. To this end, we develop an open economy new-Keynesian model featuring sterilized interventions in the foreign exchange (FX) market as an additional central bank instrument operating alongside the Taylor rule, and affecting the economy through portfolio balance sheet effects in the financial sector. We find that there can be advantages to combining IT with some degree of exchange rate management via FX interventions. Unlike "pure" IT or exchange rate management via interest rates, FX interventions can help insulate the economy against certain shocks, especially shocks to international financial conditions. However, managing the exchange rate through FX interventions may also hinder necessary exchange rate adjustments, e.g., in the presence of terms of trade shocks
Table Of Contents
Cover; Contents; I: Introduction; II: Exchange Rate Targeting and Exchange Rate Intervention: Two Unrelated Literatures; III: Key concepts; IV: Model; A: Balance sheets; B: Central bank behavior; C: Financial sector behavior; D: Households behavior; E: Rest of the model; V: Discussion; VI: Simulations; VII: Conclusions; Tables; 1 Macroeconomic volatility under various policy regimes; Figures; 1 Foreign Interest Rate Shock in Different Exchange Rate Regimes; 2 Temporary terms-of-trade shock in different exchange rate regimes; 3 Permanent terms-of-trade shock in different exchange rate regimes
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (44 p.)
Specific Material Designation
Form Of Item

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