{
  "title": "FX Intervention in the New Keynesian Model",
  "publication": "IMF Working Papers, September 29, 2017",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2017/09/29/fx-intervention-in-the-new-keynesian-model-45215",
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  "summary": "We develop an open economy New Keynesian Model with foreign exchange intervention in the presence of a financial accelerator mechanism.",
  "sections": [
    {
      "heading": "Document",
      "content": "- Authors: Zineddine Alla, Raphael A Espinoza, Atish R. Ghosh\n- Publication type: IMF Working Papers\n- Date: September 29, 2017"
    },
    {
      "heading": "Model and methodology",
      "content": "- Develops an open economy New Keynesian Model with foreign exchange (FX) intervention in the presence of a financial accelerator mechanism.\n- Obtains closed-form solutions for:\n  - the optimal interest rate policy, and\n  - FX intervention under discretionary policy,\n  in the face of shocks to risk appetite in international capital markets."
    },
    {
      "heading": "Main findings",
      "content": "- FX intervention can help reduce the volatility of the economy.\n- FX intervention can mitigate the welfare losses associated with shocks to risk appetite in international capital markets.\n- When the financial accelerator is strong, the risk of multiple equilibria (self-fulfilling currency and inflation movements) is high.\n- The authors determine the conditions under which indeterminacy can occur."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Use of FX intervention can reinforce the central bank’s credibility.\n- FX intervention can limit the risk of multiple equilibria, thereby reducing the likelihood of self-fulfilling speculative attacks and volatile currency and inflation dynamics.\n- Optimal policy design should account for interactions between financial accelerator effects and international risk-premium shocks when choosing the combination of interest rate policy and FX intervention."
    },
    {
      "heading": "Key concepts and topics covered",
      "content": "- Consumption\n- Exchange rates\n- Foreign exchange\n- Inflation\n- National accounts\n- Prices\n- Return on investment\n- Capital controls, Capital flows\n- Central bank, Central bank reserves\n- Equilibrium determinacy\n- FX intervention, sterilized foreign exchange intervention\n- Open Economy New Keynesian Model\n- Portfolio balance model\n- Risk premium, risk premium shock\n- Speculative attack\n- Terms of trade, working capital\n\nSource: IMF Working Paper \"FX Intervention in the New Keynesian Model\" by Zineddine Alla, Raphael A Espinoza, and Atish R. Ghosh, September 29, 2017.\n\n---\n\n Content in this bundle\n\n- FX Intervention in the New Keynesian Model, WP/17/207, September 2017\n  - FX Intervention in the New Keynesian Model, WP/17/207, September 2017 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - FX Intervention in the New Keynesian Model, WP/17/207, September 2017 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2017/09/29/fx-intervention-in-the-new-keynesian-model-45215"
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    "Authors: Zineddine Alla, Raphael A Espinoza, Atish R. Ghosh",
    "Published: September 29, 2017",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484320617.001",
    "Authors: Zineddine Alla, Raphael A Espinoza, Atish R. Ghosh",
    "Publication type: IMF Working Papers",
    "Date: September 29, 2017",
    "Develops an open economy New Keynesian Model with foreign exchange (FX) intervention in the presence of a financial accelerator mechanism.",
    "Obtains closed-form solutions for:",
    "FX intervention can help reduce the volatility of the economy.",
    "FX intervention can mitigate the welfare losses associated with shocks to risk appetite in international capital markets.",
    "When the financial accelerator is strong, the risk of multiple equilibria (self-fulfilling currency and inflation movements) is high.",
    "The authors determine the conditions under which indeterminacy can occur.",
    "Use of FX intervention can reinforce the central bank’s credibility.",
    "FX intervention can limit the risk of multiple equilibria, thereby reducing the likelihood of self-fulfilling speculative attacks and volatile currency and inflation dynamics.",
    "Optimal policy design should account for interactions between financial accelerator effects and international risk-premium shocks when choosing the combination of interest rate policy and FX intervention.",
    "Consumption",
    "Exchange rates",
    "Foreign exchange",
    "Inflation",
    "National accounts",
    "Prices",
    "Return on investment",
    "Capital controls, Capital flows",
    "Central bank, Central bank reserves",
    "Equilibrium determinacy",
    "FX intervention, sterilized foreign exchange intervention",
    "Open Economy New Keynesian Model",
    "Portfolio balance model",
    "Risk premium, risk premium shock",
    "Speculative attack",
    "Terms of trade, working capital",
    "**FX Intervention in the New Keynesian Model, WP/17/207, September 2017**"
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