Intervention Under Inflation Targeting--When Could It Make Sense?
IMF Working Papers, January 17, 2020
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Bibliographic details
- Authors: David J Hofman, Marcos Chamon, Pragyan Deb, Thomas Harjes, Umang Rawat, Itaru Yamamoto
- Published: January 17, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513526027.001
Core findings
- Investigates motives inflation-targeting central banks in emerging markets may have for intervening in foreign exchange markets and evaluates the case for such interventions based on the existing literature.
- The rationale for interventions depends on initial conditions and country-specific circumstances.
- The case for intervention is strongest in the presence of large currency mismatches or underdeveloped markets.
- Interventions can have benefits in the short-term, but sustained intervention over time could entrench unfavorable initial conditions; more work is needed to establish this empirically.
- A first effort to measure the cost of interventions to the credibility of policy frameworks suggests that the negative impact may be smaller than often assumed—at least for the set of more sophisticated inflation-targeting emerging-market central banks considered here.
Policy implications and considerations
- Intervene when country-specific initial conditions (for example, large currency mismatches) and market development justify short-term benefits.
- Recognize trade-offs: short-term stabilization benefits versus the risk that sustained intervention may entrench unfavorable initial conditions.
- Consider the limited and context-dependent credibility costs of intervention indicated by initial measurements for more sophisticated inflation-targeting emerging-market central banks.
Scope, approach, and subject coverage
- Focus: inflation-targeting central banks in emerging markets and foreign exchange market intervention.
- Approach: literature-based evaluation and an initial empirical effort to measure credibility costs.
- Subjects and keywords included in the work: Banking, Currency markets, Exchange rate flexibility, Exchange rates, Financial markets, Foreign exchange, Inflation, Inflation targeting, Monetary policy, Prices; keywords include Bank FXI, capital flows, central bank intervention, Currency markets, EME inflation targeters, emerging market, emerging markets, Exchange rate flexibility, exchange rate volatility, Exchange rates, foreign exchange intervention, FX intervention, FX market intervention, Global, Inflation, inflation credibility concern, inflation expectation, Inflation targeting, inflation-targeting Asian EMEs, intervention rule, intervention strategy, IT literature, managed exchange rate regime, market condition, monetary and exchange rate policies, WP.
Source: Intervention Under Inflation Targeting--When Could It Make Sense?, IMF Working Papers, January 17, 2020, https://www.imf.org/en/publications/wp/issues/2020/01/17/intervention-under-inflation-targeting-when-could-it-make-sense-48938
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