Optimal FX Interventions with Limited Reserves
IMF Working Papers, December 12, 2025
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- Optimal FX Interventions with Limited Reserves
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Bibliographic details
- Authors: Marcin Kolasa, Oliver Vogt, Pawel Zabczyk
- Published: December 12, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229033787.001
Research question and framework
- Investigates the optimal time-consistent use of foreign exchange interventions (FXI) in a small open economy model.
- Model drivers: endowment shocks and portfolio flow shocks.
- Key model features:
- Endogenous FX market depth.
- A lower bound constraint on FX reserves.
- Competitive equilibrium environment.
Core findings
- Large capital flows:
- Increase conditional exchange rate volatility.
- Make FX markets more shallow.
- Central bank optimal interventions in the constrained environment differ from the unconstrained case:
- Not solely targeted at offsetting inefficient fluctuations in the UIP premium.
- Incorporate a forward-looking element due to the risk of depleting reserves.
- Policy characteristics:
- Optimal time-consistent FXI policy is state-dependent.
- FX sales are more effective than FX purchases.
- The policy response to capital outflows may be less than one-for-one or more than one-for-one depending on:
- The size of capital outflows.
- The economy's net foreign asset position.
Policy implications and comparisons
- Adopting the optimal state-dependent time-consistent FXI policy:
- Delivers sizable welfare gains.
- These gains significantly exceed those from a simple rule directed at stabilizing current capital flows.
- However, the welfare gains materialize only if the initial level of FX reserves is sufficiently far from its effective lower bound.
Subject classifications and keywords
- Subject: Currencies, Currency markets, Exchange rates, Financial markets, Financial services, Foreign exchange, Interest rate parity, Money
- Keywords: capital flow, Capital Flows, Currencies, Currency markets, Exchange rates, FX intervention, FX Interventions, FX purchase, FX sale, Global, IMF working papers, Interest rate parity, Lower Bound on FX Reserves, Time-Consistent Policy
IMF Working Paper No. 2025/261 — "Optimal FX Interventions with Limited Reserves" by Marcin Kolasa, Oliver Vogt, and Pawel Zabczyk (December 12, 2025).
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