Monetary policy consequences of foreing exchange interventions

Available from: 
October 2013
Paper author(s): 
Andrés Gonzalez (Banco de la República, Colombia)
Hernando Vargas (Banco de la República, Colombia)
Diego Rodríguez (Banco de la República, Colombia)
Macroeconomics - Economic growth - Monetary Policy

It is argued that if sterilized FX intervention is effective due to the operation of the portfolio balance channel, it may also have an expansionary effect on credit supply and aggregate demand. In this case, the macroeconomic outcomes of intervention depend on the monetary policy response. This issue is studied with a small open economy DSGE. In general, FX intervention implies a volatility of credit and consumption that is higher than under a more efficient allocation and under alternative monetary regimes without intervention. Furthermore, the more inclined the central bank is to meet an inflation target, the stronger its response to the expansionary effects of the intervention and, consequently, the lower the impact of the intervention on the exchange rate.


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Research section: 
Lacea 2013 annual meeting
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