Foreign exchange intervention and macroeconomic stability

Vitale, Paolo (2001) Foreign exchange intervention and macroeconomic stability. Discussion paper, 317. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

Using a standard monetary policy model, we study how foreign exchange intervention may be used to condition the perception among economic agents of the objective of the policymaker. Foreign exchange intervention does not bring about a systematic policy again, such as an increase in the equilibrium level of employment or a reduction in the inflationary bias. However, it can stabilise the economy, for it drastically reduces the fluctuations of real variables such as the output and employment levels. This stability gain is obtained at the cost of greater volatility of nominal variables, such as the nominal wage, the price level and the exchange rate. We also find that sterilised intervention is generally profitable. Finally, our analysis outlines a trade-off between the profits the central bank gains and the stability gain sterilised intervention brings about.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://fmg.lse.ac.uk
Additional Information:	© 2001 The Author
Library of Congress subject classification:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
Sets:	Research centres and groups > Financial Markets Group (FMG) Collections > Economists Online Collections > LSE Financial Markets Group (FMG) Working Papers
Identification Number:	317
Date Deposited:	28 Aug 2009 09:54
URL:	http://eprints.lse.ac.uk/25039/

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