Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia
IMF Working Papers, April 1, 2008
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- Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia
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Bibliographic details
- Authors: Herman Kamil
- Published: April 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451869491.001
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.
Key findings and evidence
- Exchange rate intervention effectiveness varied over time:
- Effective during 2004-2006 under monetary easing with foreign currency purchases.
- Ineffective in 2007 when large-scale intervention conflicted with inflation targets amid an overheating economy.
- Financial market structure influence:
- Growth in depth and sophistication of currency derivative markets materially reduced the potency of central bank intervention.
Policy implications and considerations
- Interaction between monetary policy stance and FX intervention:
- Intervention can be effective when aligned with monetary easing.
- Intervention becomes constrained or counterproductive when it conflicts with domestic inflation objectives in an overheating economy.
- Market structure matters:
- The expansion of currency derivative markets can blunt the effectiveness of central bank FX intervention, suggesting the need to account for market depth and instruments when designing intervention strategies.
Publication and metadata
- Author: Herman Kamil
- Date: April 1, 2008
- Series: Working Paper No. 2008/088
- Issue: 088
- Volume: 2008
- Pages: 42
- DOI: https://doi.org/10.5089/9781451869491.001
- ISBN: 9781451869491
- ISSN: 1018-5941
- Subject: Bank resolution, Currencies, Exchange rates, Foreign exchange intervention, Inflation
- Keywords: currency appreciation, discretionary intervention, intervention operation, monetary policy, U.S. dollar, WP
IMF Working Paper — Herman Kamil (April 1, 2008), "Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia".