Exchange Rate Policies at the Zero Lower Bound

Manuel Amador, Javier Bianchi, Luigi Bocola, Fabrizio Perri

NBER Working Paper No. 23266
Issued in March 2017, Revised in June 2018
NBER Program(s):The Asset Pricing Program, The Economic Fluctuations and Growth Program, The International Finance and Macroeconomics Program, The Monetary Economics Program

We study the problem of a monetary authority pursuing an exchange rate policy that is inconsistent with interest rate parity because of a binding zero lower bound constraint. The resulting violation in interest rate parity generates an inflow of capital that the monetary authority needs to absorb by accumulating foreign reserves. We show that these interventions by the monetary authority are costly, and we derive a simple measure of these costs: they are proportional to deviations from the covered interest parity (CIP) condition and the amount of accumulated foreign reserves. Our framework can account for the recent experiences of “safe-haven” currencies and the sign of their observed deviations from CIP.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w23266

Users who downloaded this paper also downloaded* these: