Does the South African rand's relatively large volatility affect inflation? To shed some light on this question, a standard estimation technique of exchange rate pass-through to inflation is extended to incorporate exchange rate volatility. Estimated results suggest that higher exchange rate...

We analyze the profitability of FX swaps used by the central bank of Brazil to shed light on the rationale for FX intervention. We find that swaps are profitable in expectation, suggesting that FX intervention is used to stabilize the exchange rate in the face of temporary excessive movements...

Emerging markets (EMs) often respond to shocks by intervening in foreign exchange (FX) markets and thus preventing full exchange rate adjustment. This response can serve to dampen the effect of shocks and increase monetary policy space but may also incentivize economic participants to increase...

We study a wide range of hybrid inflation-targeting (IT) and managed exchange rate regimes, analyzing their implications for inflation, output and the exchange rate in the presence of various domestic and external shocks. To this end, we develop an open economy new-Keynesian model featuring...

We develop an open economy New Keynesian Model with foreign exchange intervention inthe presence of a financial accelerator mechanism. We obtain closed-form solutions for theoptimal interest rate policy and FX intervention under discretionary policy, in the face ofshocks to risk appetite in...

This paper takes a new approach to assess the costs and benefits of using different policy tools-macroprudential, monetary, foreign exchange interventions, and capital flow management-in response to changes in financial conditions. The approach evaluates net benefits of policies using quadratic...

This paper analyzes the use of unconventional policy instruments in New Keynesian setups in which the ‘divine coincidence' breaks down. The paper discusses the role of a second instrument and its coordination with conventional interest rate policy, and presents theoretical results on...

The COVID-19 crisis induced an unprecedented launch of unconventional monetary policy through asset purchase programs (APPs) by emerging market and developing economies. This paper presents a new dataset of APP announcements and implementation from March until August 2020 for 27 emerging markets...

We study the optimal management of capital flows in a small open economy model with financial frictions and multiple policy instruments. The paper reports two main findings. First, both foreign exchange intervention (FXI) and macroprudential polices are tools complementary to the monetary policy...

Countries with de jure floating exchange rate regimes are often reluctant to allow their currencies to float freely in practice. One reason why countries may wish to limit exchange rate volatility is potential negative balance sheet effects due to currency mismatches on the balance sheets of...