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Monetary Policy in Sub-Saharan Africa$
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Andrew Berg and Rafael Portillo

Print publication date: 2018

Print ISBN-13: 9780198785811

Published to Oxford Scholarship Online: April 2018

DOI: 10.1093/oso/9780198785811.001.0001

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Modelling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New Keynesian Framework

Modelling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New Keynesian Framework

Chapter:
(p.232) Chapter 13 Modelling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New Keynesian Framework
Source:
Monetary Policy in Sub-Saharan Africa
Author(s):

Jaromir Benes

Andrew Berg

Rafael Portillo

David Vavra

Publisher:
Oxford University Press
DOI:10.1093/oso/9780198785811.003.0013

The authors study a wide range of hybrid inflation-targeting (IT) and managed exchange rate regimes, analysing their implications for inflation, output and the exchange rate in the presence of various domestic and external shocks. To this end, the chapter presents an open economy New Keynesian model featuring sterilized interventions in the foreign exchange (FX) market as an additional central bank instrument operating alongside the Taylor rule, and affecting the economy through portfolio balance sheet effects in the financial sector. The chapter shows that there can be advantages to combining IT with some degree of exchange rate management via FX interventions. Unlike ‘pure’ IT or exchange rate management via interest rates, FX interventions can help insulate the economy against certain shocks, especially shocks to international financial conditions. However, managing the exchange rate through FX interventions may also hinder necessary exchange rate adjustments, e.g., in the presence of terms of trade shocks.

Keywords:   Developing countries, emerging markets, low-income countries, exchange rate regimes, inflation targeting, managed float, monetary policy, sterilized FX interventions, New Keynesian models

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