Munich Personal RePEc Archive

The shine beneath: foreign exchange intervention in resource-rich economies

Ortiz, Marco and Herrera, Gerardo and Perez, Fernando (2022): The shine beneath: foreign exchange intervention in resource-rich economies.

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We propose a dynamic general equilibrium model to study the optimal reaction to terms of trade shocks when international financial markets are imperfect and the composition of capital flows affects the exchange rate determination. These elements allow us to showcase the interactions between commodity prices and international financial market inefficiencies. Positive commodity price shocks will generate a real over-appreciation of the currency and an inefficiently large shift of factors between the tradable and non-tradable sectors. We study the welfare implications of foreign exchange intervention through optimal simple rules and find support for leaning-against-the-wind foreign exchange intervention. Our setup, allows us to rationalize the reserve accumulation episodes commonly observed during periods of high commodity prices in resource-rich economies.

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