## Optimal FX Interventions with Limited Reserves

_IMF Working Papers, December 12, 2025_

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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

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### 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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_Source: https://www.imf.org/en/publications/wp/issues/2025/12/12/optimal-fx-interventions-with-limited-reserves-572513_