
Contents
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1 Introduction 1 Introduction
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2 Exchange Rate Targeting and Exchange Rate Intervention: Two Unrelated Literatures 2 Exchange Rate Targeting and Exchange Rate Intervention: Two Unrelated Literatures
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2.1 The Exchange Rate Targeting Literature 2.1 The Exchange Rate Targeting Literature
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2.2 The FX Intervention Literature 2.2 The FX Intervention Literature
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3 The Model 3 The Model
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3.1 Central Bank Behaviour 3.1 Central Bank Behaviour
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3.2 Financial Sector Behaviour 3.2 Financial Sector Behaviour
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3.3 Households’ Behaviour 3.3 Households’ Behaviour
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3.4 Non-Traded Producers 3.4 Non-Traded Producers
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3.5 Exporters 3.5 Exporters
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3.6 Importers 3.6 Importers
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3.7 Labour Market Equilibrium 3.7 Labour Market Equilibrium
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3.8 Real GDP 3.8 Real GDP
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3.9 Balance of Payments 3.9 Balance of Payments
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3.10 Rest of the World 3.10 Rest of the World
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4 Steady State, Log-Linearization, and Calibration 4 Steady State, Log-Linearization, and Calibration
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4.1 Steady State 4.1 Steady State
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4.2 Calibration 4.2 Calibration
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4.3 The Log-Linearized Model 4.3 The Log-Linearized Model
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5 Simulations 5 Simulations
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5.1 A Shock to Foreign Interest Rates 5.1 A Shock to Foreign Interest Rates
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5.2 A Shock to the Terms of Trade 5.2 A Shock to the Terms of Trade
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5.3 Welfare Analysis 5.3 Welfare Analysis
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5.4 Limits of Interventions 5.4 Limits of Interventions
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6 Conclusions 6 Conclusions
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Appendix 13A: Second-order approximation to utility Appendix 13A: Second-order approximation to utility
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References References
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13 Modelling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New Keynesian Framework
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Published:March 2018
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Abstract
The authors study a wide range of hybrid inflation-targeting (IT) and managed exchange rate regimes, analysing their implications for inflation, output and the exchange rate in the presence of various domestic and external shocks. To this end, the chapter presents an open economy New Keynesian model featuring sterilized interventions in the foreign exchange (FX) market as an additional central bank instrument operating alongside the Taylor rule, and affecting the economy through portfolio balance sheet effects in the financial sector. The chapter shows that there can be advantages to combining IT with some degree of exchange rate management via FX interventions. Unlike ‘pure’ IT or exchange rate management via interest rates, FX interventions can help insulate the economy against certain shocks, especially shocks to international financial conditions. However, managing the exchange rate through FX interventions may also hinder necessary exchange rate adjustments, e.g., in the presence of terms of trade shocks.
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