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

April 1, 2008

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Format: Chicago

Herman Kamil. Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia, (USA: International Monetary Fund, 2008) accessed September 21, 2024

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.

Subject: Bank resolution, Currencies, Exchange rates, Foreign exchange intervention, Inflation

Keywords: Currency appreciation, Discretionary intervention, Intervention operation, Monetary policy, U.S. dollar, WP

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/088
Stock No:

WPIEA2008088
ISBN:

9781451869491
ISSN:

1018-5941

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