Unconventional Policies and Exchange Rate Dynamics

IMF Working Papers, November 13, 2017

Source details

Canonical URL

Unconventional Policies and Exchange Rate Dynamics

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Authors: Gustavo Adler, Ruy Lama, Juan Pablo Medina
• Published: November 13, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484324844.001

Overview

• Study of exchange rate dynamics in a two-country DSGE model with unconventional monetary and exchange rate policies.
• Comparison of cooperative solution versus self-oriented policies (Nash equilibrium).

Model and Policy Scenarios

• Two-country DSGE framework incorporating:
  • Unconventional monetary policies (e.g., QE measure, QE policy, QE stimulus, quantitative easing).
  • Exchange rate policies, including Foreign Exchange Intervention (FX intervention) and FX reserve considerations.
• Policy scenarios:
  • Cooperative solution (international policy cooperation).
  • Self-oriented policies (Nash equilibrium).

Key Findings

• Cooperative solution:
  • Features a large exchange rate adjustment that cushions the impact of negative shocks.
  • Involves a moderate use of unconventional policy instruments.
• Self-oriented policies (Nash equilibrium):
  • Entail limited exchange rate movements.
  • Lead to an aggressive use of unconventional policies in both countries.
• Overall conclusion:
  • International policy cooperation allows the exchange rate to play the traditional role of shock absorber.

Policy Implications and Recommendations

• International policy cooperation is important to restore or preserve the exchange rate's role as a shock absorber.
• Excessive reliance on unconventional policies under self-oriented frameworks can substitute for exchange rate adjustment, potentially reducing the buffering role of nominal exchange rates.
• Coordinated policy responses may reduce the need for aggressive unconventional policy use while facilitating larger, stabilizing exchange rate movements.

Subjects and Keywords (as listed)

• Subjects: Bonds, Exchange rates, Financial institutions, Foreign exchange, Monetary policy, Real exchange rates, Unconventional monetary policies
• Keywords: Bonds, demand shock, exchange rate, exchange rate depreciation, Exchange rates, Foreign Exchange Intervention, FX intervention, FX intervention policy, FX reserve, Global, International Policy, nominal exchange rate, nominal interest rate, QE measure, QE policy, QE stimulus, quantitative easing, Real exchange rates, Unconventional monetary policies, WP

Unconventional Policies and Exchange Rate Dynamics — Gustavo Adler, Ruy Lama, Juan Pablo Medina; November 13, 2017.

Content in this bundle

• Unconventional Policies and Exchange Rate Dynamics, WP/17/237, November 2017
  • Unconventional Policies and Exchange Rate Dynamics, WP/17/237, November 2017 (Markdown version)
  • Unconventional Policies and Exchange Rate Dynamics, WP/17/237, November 2017 (PDF)