Patterns of Foreign Exchange Intervention under Inflation Targeting

IMF Working Papers, May 29, 2020

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Canonical URL: Patterns of Foreign Exchange Intervention under Inflation Targeting

The paper documents the use of foreign exchange intervention (FXI) across countries and monetary regimes, with special attention to its use under inflation targeting (IT).
Significant differences between advanced and emerging market economies:
- Advanced economies conduct FXI limitedly and broadly symmetrically.
- Emerging market countries use FXI pervasively and mostly asymmetrically (biased towards purchasing foreign currency, even after taking into account precautionary motives).
Within emerging markets, the use of FXI is common both under IT and non-IT regimes.
No evidence that FXI is used in response to inflation developments.
Strong evidence that FXI responds to exchange rates, indicating that IT central banks in EMDEs have dual inflation/exchange rate objectives.
A higher propensity to overshoot inflation targets is found in emerging market economies where FXI is more pervasive.

Focus on cross-country patterns of FXI and contrasts between advanced economies and emerging market economies.
Attention to the interaction between inflation targeting regimes and FXI behavior.
Examination of motives behind FXI, including precautionary motives and exchange rate objectives, and their observable implications.

Subject: Exchange rate adjustments, Exchange rates, Foreign exchange, Foreign exchange intervention, Inflation, Inflation targeting, Monetary policy, Prices
Keywords: exchange rate, Exchange rate adjustments, Exchange rates, foreign exchange, foreign exchange intervention, FXI proxy, Global, Inflation, inflation expectation, inflation objective, inflation outcome, inflation targeting, IT regime, use of FXI, WP