Foreign Exchange Interventions and Monetary Policy: Evidence from Emerging Economies

Abstract

The role of foreign exchange interventions in the conduct of monetary policy is an ongoing debatable issue, especially in inflation-targeting emerging economies, where monetary authority can follow other targets rather than price stability. This study examines whether interventions in foreign exchange markets affect the setting of interest rates in countries where price stability is the main target of monetary policy. We used the ARDL model to investigate the matter of the intervention policy as well as its asymmetric impacts on monetary policy. The results provide evidence of the significant effect of foreign exchange interventions on monetary policy in inflation-targeting emerging economies, implying the existence of fear of floating. Particularly, interest rate changes can mitigate or accommodate the intervention policy, depending on countries. Furthermore, the interventions have asymmetric effects on monetary policy, showing a bias toward sale interventions. Sale interventions play a more pronounced effect in most emerging economies, excepting for Thailand where purchase intervention effect is of importance.