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Central bank securities and FX market intervention in a developing economy

Direye, Eli and Khemraj, Tarron (2021): Central bank securities and FX market intervention in a developing economy. Published in: Review of Development Economics (7 October 2021)

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Abstract

The Bank of Papua New Guinea has maintained an active policy of foreign exchange market intervention. This monetary tool is associated with a depreciating currency and a worsening shortage of foreign currencies in the domestic market – suggesting that at most the policy instrument leans against existing FX market pressure. However, the one-sided sales of central bank securities (or bills) engender an appreciation of the rate and an easing of the shortage in the domestic FX market. Supported by empirical evidence, we demonstrate that the one-sided sales of central bank bills perform like an instrument of monetary policy for foreign exchange market stability in the presence of persistent non-remunerated excess bank reserves.

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