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.
"Capital Flows and Foreign Exchange Intervention."
American Economic Journal: Macroeconomics,
Financial Markets and the Macroeconomy
Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
Current Account Adjustment; Short-term Capital Movements
International Monetary Arrangements and Institutions
Open Economy Macroeconomics