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  3. American Economic Journal: Macroeconomics
  4. April 2019
  5. Capital Flows and Foreign Exchange Intervention

Capital Flows and Foreign Exchange Intervention

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Abstract

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.

Citation

Cavallino, Paolo. 2019. "Capital Flows and Foreign Exchange Intervention." American Economic Journal: Macroeconomics, 11 (2): 127-70. DOI: 10.1257/mac.20160065

Additional Materials

JEL Classification

  • E44 Financial Markets and the Macroeconomy
  • E52 Monetary Policy
  • E63 Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
  • F31 Foreign Exchange
  • F32 Current Account Adjustment; Short-term Capital Movements
  • F33 International Monetary Arrangements and Institutions
  • F41 Open Economy Macroeconomics
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