foreign exchange interventions under inflation targeting

7/31/2019 Foreign Exchange Interventions Under Inflation Targeting

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Presentation on the paper written by T. Holub


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Content Introduction

Theoretical background

Historical background

Management of the Exchange rate

Conclusion


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Introduction

Not an exhaustive econometric analysis

Aim of the paper:

what is current approach to managing exchange rate float

Helpful for further research

Contribution to international literature

Lessons for the future ERM II regime

Only direct interventions discussed


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Theoretical Background

Exchange rate pegs popular in the past stabilisation

strategy for many transition countries

Currency crises in the 90s need for a change of ER regime

bipolar view on pegs either hard peg or none at all

More countries switched to floating, currency board,

monetary union


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Theoretical Background

3 options to create nominal anchor (flexible ER)

just-do-it policy without explicit nominal anchor

Money targeting strategy

Inflation targeting (most used)

Challenges of ER interventions:

Lack of apparent effectiveness

Impact on the credibility of monetary policy framework


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Current monetary policy regime in CZ:

Inflation targeting + managed floating (since 1997)

Until then fixed ER

Managed due to restrictive policy measures

Mid 90s situation deteriorated

1997 Asian crisis -> pressure on ER to devaluate -> CZK

depreciated by 10%

Switched to inflation targeting to create new nominal anchor


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Starting conditions for the Czech inflation targeting:

1st transition country to adopt it

developed as disinflation strategy

due to openness of Czech economy CZ more

vulnerable to exogenous and ER shocks

Czech inflation targeting evolved in time

well developed, modern monetary policy regime


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ER Developments and policy responses


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CNB announced managed floating

Occasionally intervened directly in the FE market

Mostly purchasing of foreign currency to slow down ER

appreciation


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Effectiveness of ER management

In some cases visible immediate impact on ER

occasionally it might last up to 2 or 3 months

No particular optimal intervention strategy

Something can work in one situation, but mayhave had little

effect in another one

Even successful interventions not able to prevent

relatively prolonged periods of exchange rate overvaluation


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Effectiveness of ER management

Econometric methods for estimating the effects of ER

interventions:

Answering 3 questions: immediate impact?

Medium-term impact?

Impact on volatility of the ER?

ER equation + reaction function of the Central Bank

GARCH model of ER


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Consistency of Interventions with inflation

targeting

Target consistency

Regime consistency Procedural consistency


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Conclusion

Not much advice in the literature usually recommending purefloating

No clear answer for the effectiveness of interventions

CZ managed floating ER with the euro Two waves of appreciation in 1998 and 2001

Interventions mostly against appreciation

Suggested policy conclusions:

Larger as well as smaller economies better of with freely floating,

rare interventions

Avoid interventions in case of conflict with inflation targets


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foreign exchange interventions under inflation targeting

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