Working Paper: NBER ID: w24463
Authors: Roberto Chang
Abstract: Received wisdom posits that sterilized foreign exchange intervention can be effective by altering the currency composition of assets held by the public. This paper proposes an alternative channel: sterilized intervention may (or may not) have real effects because it changes the net credit position of the central bank vis a vis financial intermediaries, thereby affecting external debt limits. This argument is developed in the context of an open economy model with domestic banks subject to occasionally binding collateral constraints. Intervention has real effects if and only if it occurs when the constraints bind; at such times, a sterilized sale of official reserves relaxes the constraints by reducing the central bank's debt to domestic banks, freeing resources for the latter to increase the supply of credit to domestic agents. The analysis yields several noteworthy implications for intervention policy, official reserves accumulation, and the interaction between intervention and monetary policy.
Keywords: Foreign Exchange Intervention; Monetary Policy; Financial Constraints
JEL Codes: E58; F33; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sterilized foreign exchange intervention (F31) | net credit position of the central bank (E58) |
| net credit position of the central bank (E58) | supply of credit to domestic agents (E51) |
| supply of credit to domestic agents (E51) | aggregate demand (E00) |
| sterilized foreign exchange intervention (F31) | external debt limits (F34) |
| sterilized foreign exchange intervention (F31) | macroeconomic aggregates (E10) |