OECD Economics Department Working Papers
Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
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- ISSN : 18151973 (en ligne)
- https://doi.org/10.1787/18151973
Interdependencies between Monetary policy and Foreign-Exchange Intervention under Inflation Targeting
The Case of Brazil and the Czech Republic
The bulk of recent literature on foreign-exchange interventions has overlooked the potential
interdependencies that may exist between these operations and the conduct of monetary policy. This is the
case even under inflation targeting and especially in emerging-market economies, because central banks
often explicitly reserve the right to intervene to calm disorderly markets and to accumulate foreign
reserves, and when the exchange rate is perceived as out of step with fundamentals. This paper uses a
friction model to estimate intervention reaction functions and the associated marginal effects for Brazil and
the Czech Republic since adoption of inflation targeting in these countries in 1999 and 1998, respectively.
The main findings are that: i) in both countries interventions occur predominantly to reduce exchange-rate
volatility, while in Brazil the central bank also reacts to exchange-rate deviations from medium-term
trends; ii) there are strong, asymmetric threshold effects in the reaction functions, and interventions are
more likely and of higher magnitudes when they are carried out to depreciate than to appreciate the
domestic currency; and iii) interventions seem to take place independently of contemporaneous monetary
policy in Brazil, but not in the Czech Republic, where both policies appear to be interrelated.
Mots-clés: intervention, inflation targeting, Czech Republic, friction model, Brazil, monetary policy
JEL:
C24: Mathematical and Quantitative Methods / Single Equation Models; Single Variables / Single Equation Models; Single Variables: Truncated and Censored Models; Switching Regression Models; Threshold Regression Models;
E52: Macroeconomics and Monetary Economics / Monetary Policy, Central Banking, and the Supply of Money and Credit / Monetary Policy;
F31: International Economics / International Finance / Foreign Exchange
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