Central Bank Intervention in the Inflation Targeting

Abstract

This paper analyses the impact of central bank interventions in the inflation targeting regime. The results of empirical studies in this paper show if there is a shock of the exchange rate, which would lead to depreciation of the exchange rate, a central bank may decide to mush instability on the foreign exchange market with foreign exchange interventions, thereby preventing the sudden exchange rate depreciation, which would then require a smaller reaction by the interest rate. Namely, through foreign exchange interventions, the central bank greatly absorbs the depreciation shock and, consequently, inflation is lower. As a result of lower price growth, the need for a monetary policy response to an interest rate is also lower. Based on this example, we can see that central bank intervention in some cases can be very useful in order to correct disturbances in the foreign exchange market. Therefore, some central banks accumulate foreign exchange reserves at a very high level so as to have enough space for foreign exchange intervention, without the risk of falling foreign exchange reserves below the optimum level.

Resilience and Path Dependency: Income Distribution Effects of GDP in Colombia

“…However, both income inequality and growth are affected by other intermediation decisions by the policymakers (Guillaume, 2021). Hence analyzing the central bank policies and their types are rather crucial in reducing income inequality and fostering growth and reducing inflation (Krušković, 2022) in a sustainable manner. Certainly, after the COVID-19 crisis, there is even increasing attention to resilience (Luburić, 2021;Krušković, 2022).…”

“…Hence analyzing the central bank policies and their types are rather crucial in reducing income inequality and fostering growth and reducing inflation (Krušković, 2022) in a sustainable manner. Certainly, after the COVID-19 crisis, there is even increasing attention to resilience (Luburić, 2021;Krušković, 2022). Our paper highlights that resilience begins with sustainable growth, while income inequality concerns must be as part of sustainable and resilient growth.…”

Evaluating the Role of the Exchange Rate in Monetary Policy Reaction Function of Advanced and Emerging Market Economies

“…It is especially the case on the part of developing countries that operated under the exchange rate targeting regime immediately before the adoption of the inflation targeting. Due to the lack of developed foreign exchange markets, less developed countries are frequently exposed to the phenomenon addressed as "fear of floating" (Krušković, 2022). Moreover, a series of different factors could create and lead to a currency crisis and several years period is needed to eliminate these factors (Yazdani and Nikzad, 2021).…”

Quantitative Easing and Macroeconomic Performance in the United States

“…According to Coenen and Wieland (2003) and Peersman (2011) and their analysis of coordinated monetary policy, quantitative easing causes an upshift in inflation. As confirmed by Krušković (2022), central bank intervention in inflation targeting is utilized as a tool which secures the necessary liquidity in the foreign exchange market, prevents the exchange rate cycle, prevents the currency crisis and, therefore, precludes the extreme fluctuation of the interest rate, everything with the goal of achieving a defined inflation target or the specific inflation target range. Sadahiro (2005) executed Vector Error Correction Model analysis, in which the impulse responses of the inflation rate and industrial production to an increase in the monetary base resulted in a fact that industrial production does increase, albeit the magnitude is minimal, while the inflation rate decreases.…”