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Accumulating Foreign Reserves Under Floating Exchange Rates
Author:
Fernando M. Gonçalves
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Series:
IMF Working Papers
Volume/Issue:
Volume 2008: Issue 096
Language:
English
Publication Date:
01 Apr 2008
DOI:
https://doi.org/10.5089/9781451869576.001
ISBN:
9781451869576
ISSN:
1018-5941
Pages:
41
Keywords:
WP; mover accent; monetary policy
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Official accumulation of foreign reserves may be perceived as interventions to influence the exchange rate, undermining the credibility of floating exchange rates and inflation targets. This paper develops a theoretical framework to study the interaction between reserve accumulation and monetary policy. The model uncovers a trade-off between the speed of reserve accumulation and anti-inflationary credibility. Under reasonable assumptions, delegation of intervention and monetary policy decisions to separate government agencies allows faster reserve accumulation, while centralization of these decisions results in a more stable economy. The analysis underscores the importance of rather overlooked institutional features of policymaking in open economies.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund