Foreign Exchange Intervention as a Monetary Policy Instrument: Evidence for Inflation Targeting Countries

ISBN-13: 9783790801286 / Angielski / Miękka / 2003 / 175 str.

Felix Hufner

Opis

Foreign exchange intervention is frequently being used by central banks in countries which have a floating exchange rate. Most theoretical monetary policy models, however, do not take this phenomenon into account. This book contributes to close this gap between theory and practice by interpreting foreign exchange intervention as an additional monetary policy instrument for inflation targeting central banks. In-depth empirical analyses of the foreign exchange operations and interest rate policy of five inflation targeting countries (Australia, Canada, New Zealand, Sweden and the United Kingdom) demonstrate how foreign exchange intervention is used in practice.

Spis treści

1 Introduction.- 1.1 Background.- 1.2 Approach to the Problem and Research Strategy.- 1.3 Structure of the Analysis.- 2 The Conventional View on Inflation Targeting.- 2.1 Definition and Elements of Inflation Targeting.- 2.1.1 Lack of an Explicit Intermediate Target.- 2.1.2 Price Stability as the Final Target.- 2.1.3 Publication of a Numerical Target.- 2.1.4 Transparent Communication of Central Bank Decisions.- 2.1.5 Increased Accountability of the Central Bank.- 2.1.6 Summary and Assessment.- 2.2 Adoption of Inflation Targeting.- 2.2.1 Overview.- 2.2.2 Country Selection.- 2.3 A Basic Model for (Closed-Economy) Inflation Targeting.- 2.4 Open Economy Inflation Targeting.- 2.4.1 Exchange Rate Pass-Through and Monetary Policy.- 2.4.2 The Svensson Model.- 2.4.3 The Ball Model.- 2.4.4 Two Critical Assumptions.- 3 Uncovered Interest Parity in Practice.- 3.1 The Rationale of Interest Parity.- 3.1.1 Covered Interest Parity.- 3.1.2 Uncovered Interest Parity.- 3.2 An Empirical Test for Inflation Targeting Countries.- 3.3 Consequences of the Failure of UIP.- 4 Sterilised Interventions as an Additional Policy Instrument.- 4.1 Explaining and Interpreting Sterilised Interventions.- 4.1.1 Channels for Influencing Exchange Rates.- 4.1.2 Sterilised Interventions as a Monetary Policy Instrument.- 4.1.3 Sterilisation Evidence for Inflation Targeting Countries.- 4.1.4 Managed Floating in Theory.- 4.1.5 Limitations of Sterilised Interventions.- 4.2 The Effectiveness of Sterilised Interventions: A Review of the Literature.- 4.2.1 The Intervention Debate.- 4.2.2 The Inefficiency of Sterilised Interventions in Monetary Models.- 4.2.3 The Portfolio Balance Channel of Interventions.- 4.2.4 Interventions as a Signal of Future Monetary Policy.- 4.2.5 Noise-Traders and the Role of Sterilised Interventions.- 4.2.6 The Microstructure Approach and Sterilised Interventions.- 4.2.7 Assessment of Intervention Models.- 5 Sterilised Foreign Exchange Intervention in Practice.- 5.1 Foreign Exchange Reserves as an Intervention Proxy.- 5.1.1 Reasons for Holding Foreign Exchange Reserves.- 5.1.2 Mechanics of Foreign Exchange Intervention.- 5.1.3 External Influences on Foreign Exchange Reserves and Their Adjustment.- 5.1.3.1 Identification and Correction of Valuation Effects.- 5.1.3.2 Estimation of Interest Earnings.- 5.1.4 The Correlation between Official Interventions and Reserves.- 5.1.5 Active versus Passive Interventions.- 5.2 Intervention Activity in Inflation Targeting Countries.- 5.2.1 Comparison of Intervention Capacities.- 5.2.2 Comparison of Reserve Changes.- 5.2.2.1 Correction for Valuation Changes.- 5.2.2.2 Correction for Interest Earnings.- 5.2.3 Identification of Intervention Activity.- 5.2.3.1 Absolute Reserve Changes.- 5.2.3.2 Normalisation with the Degree of Openness.- 5.2.3.3 Normalisation with the Size of Foreign Exchange Markets.- 5.2.3.4 Response to Shocks.- 5.2.4 Ranking of Intervention Activity.- 5.3 The Use of Interventions as an Additional Policy Instrument.- 5.3.1 Interventions and the Variation of Interest Rates.- 5.3.1.1 Interest Rate Volatility Compared.- 5.3.1.2 Frequency of Policy Rate Changes Compared.- 5.3.1.3 Interpretation of the Findings.- 5.3.2 Policy Reaction Functions and Exchange Rates.- 5.3.2.1 Evolution of Taylor Rules.- 5.3.2.2 Description of Data and Methods.- 5.3.2.3 Stationarity Tests.- 5.3.2.4 Country-Specific Results and Interpretation.- 5.4 Short Case Studies of the Country Experiences.- 5.4.1 New Zealand.- 5.4.2 Canada.- 5.4.3 Australia.- 5.4.4 United Kingdom.- 5.4.5 Sweden.- 6 Performance of Inflation Targeting: An Evaluation.- 7 Conclusion and Outlook.- List of Figures.- List of Tables.

Blurb

Foreign exchange intervention is frequently being used by central banks in countries which have a floating exchange rate. Most theoretical monetary policy models, however, do not take this phenomenon into account. This book contributes to closing this gap between theory and practice by interpreting foreign exchange intervention as an additional monetary policy instrument for inflation targeting central banks. In-depth empirical analyses of the foreign exchange operations and interest rate policy of five inflation targeting countries (Australia, Canada, New Zealand, Sweden and the United Kingdom) demonstrate how foreign exchange intervention is used in practice.