Capital Flows and Foreign Exchange Intervention

By Paolo Cavallino. American Economic Journal: Macroeconomics, 2019

117 citations recorded by the source corpus.

I consider a small open economy model where international financial markets are imperfect and the exchange rate is determined by capital flows. I use this framework to study the effects of portfolio flow shocks, derive the optimal foreign exchange intervention policy, and characterize its interaction with monetary policy. I derive the optimal intervention rule in closed form as a function of three implicit targets. Finally, using Swiss data, I estimate the model to quantify the inefficiencies generated by capital flow shocks and the optimal size of the intervention. (JEL E44, E52, E63, F31, F32, F33, F41)

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/75a679b5f199a3fa34869fe887c932b3c4deb9ce