FX Intervention in the New Keynesian Model

We develop an open economy New Keynesian Model with foreign exchange intervention in the presence of a financial accelerator mechanism. We obtain closed-form solutions for the optimal interest rate policy and FX intervention under discretionary policy, in the face of shocks to risk appetite in inter...

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Bibliographic Details
Main Author: Alla, Zineddine
Other Authors: Espinoza, Raphael, Ghosh, Atish
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2017
Series:IMF Working Papers
Subjects:
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
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245 0 0 |a FX Intervention in the New Keynesian Model  |c Zineddine Alla, Raphael Espinoza, Atish Ghosh 
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651 4 |a United States 
653 |a Saving and investment 
653 |a Prices 
653 |a Foreign Exchange 
653 |a Deflation 
653 |a Saving 
653 |a Economics 
653 |a Monetary Policy 
653 |a Macroeconomics: Consumption 
653 |a Inflation 
653 |a Foreign exchange 
653 |a Macroeconomics 
653 |a Wealth 
653 |a Consumption 
653 |a Central Banks and Their Policies 
653 |a Return on investment 
653 |a National accounts 
653 |a Currency 
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653 |a Intangible Capital 
653 |a Investments: General 
653 |a Capital 
653 |a Price Level 
653 |a Investment 
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700 1 |a Ghosh, Atish 
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520 |a We develop an open economy New Keynesian Model with foreign exchange intervention in the presence of a financial accelerator mechanism. We obtain closed-form solutions for the optimal interest rate policy and FX intervention under discretionary policy, in the face of shocks to risk appetite in international capital markets. The solution shows that FX intervention can help reduce the volatility of the economy and mitigate the welfare losses associated with such shocks. We also show that, when the financial accelerator is strong, the risk of multiple equilibria (self-fulfilling currency and inflation movements) is high. We determine the conditions under which indeterminacy can occur and highlight how the use of FX intervention reinforces the central bank's credibility and limits the risk of multiple equilibria