Full Description
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.
Contents
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.- 2.2 Adoption of Inflation Targeting.- 2.3 A Basic Model for (Closed-Economy) Inflation Targeting.- 2.4 Open Economy Inflation Targeting.- 3 Uncovered Interest Parity in Practice.- 3.1 The Rationale of 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.- 4.2 The Effectiveness of Sterilised Interventions: A Review of the Literature.- 5 Sterilised Foreign Exchange Intervention in Practice.- 5.1 Foreign Exchange Reserves as an Intervention Proxy.- 5.2 Intervention Activity in Inflation Targeting Countries.- 5.3 The Use of Interventions as an Additional Policy Instrument.- 5.4 Short Case Studies of the Country Experiences.- 6 Performance of Inflation Targeting: An Evaluation.- 7 Conclusion and Outlook.- List of Figures.- List of Tables.
