Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia

 
Author/Editor: Kamil, Herman
 
Publication Date: April 01, 2008
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: Policymakers in many emerging markets are attempting to resist currency appreciation while simultaneously meeting targets for inflation. Using the recent experience of Colombia between 2004 and 2007, this paper examines the effectiveness of the Central Bank's intervention in stemming domestic currency appreciation under an inflation targeting regime. The results indicate that exchange rate intervention was effective during 2004-2006, when foreign currency purchases were undertaken during a period of monetary easing. During 2007, on the other hand, intervention was ineffective in reversing or slowing down domestic currency appreciation, as large-scale intervention became incompatible with meeting the inflation target in an overheating economy. Currency derivative markets-which have grown in depth and sophistication-played a key role in blunting the effectiveness of intervention.
 
Series: Working Paper No. 08/88
Subject(s): Central banks | Colombia | Central bank role | Inflation targeting | Emerging markets | Intervention | Exchange rate management | Exchange rate appreciation

Author's Keyword(s): central bank intervention | effectiveness | derivatives markets.
 
English
Publication Date: April 01, 2008
Format: Paper
Stock No: WPIEA2008088 Pages: 42
Price:
US$18.00 (Academic Rate:
US$18.00 )
 
 
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