Title: Fear (no more) of Floating: Asset Purchases and Exchange Rate Dynamics
Download PDF: Working Paper 57
This paper studies the impact of local-currency asset purchases by emerging market economy central banks on financial conditions, capital flows and exchange rates, and the implications for conventional monetary policy.
Authors: Yasin Mimir (ESM), Enes Sunel (OECD)
Abstract:
We provide a theory on currency dynamics, capital flows and conditions for emerging market economy central bank asset purchases to leave room for manoeuvre for conventional monetary policy. Local-currency asset purchases ease financial conditions and boost banks’ foreign borrowing capacity. Therefore, they curb the financial amplification of government bond sell-off shocks by mitigating private sector capital outflows and the accompanying exchange rate depreciation. The resulting limited rise in inflation reduces the pro-cyclicality of conventional monetary policy. Our framework sheds light on stable exchange rate dynamics observed after the unprecedented asset purchase announcements in emerging-market economies during the COVID-19 crisis.
Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.
Keywords: Asset purchases, exchange rate, conventional monetary policy
JEL codes: E62, E63, G21