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Monetary Channel of Exchange Market Pressure and Central Bank Intervention with a Dynamic Stochastic General Equilibrium Approach
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| FARZANEH Abbasi *1, Mehdi Pedram1, Anoushirvan Taghipour |
| 1- Alzahra University |
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Abstract: (478 Views) |
| Managing exchange rate fluctuations is one of the most challenging issues in economic policymaking. The policymaker manages exchange rate fluctuations in a favorable range with appropriate policy tools. Under a managed floating exchange rate system, foreign exchange supply or demand surplus is usually adjusted by a combination of exchange rate fluctuations and foreign reserves, known as foreign exchange market pressure. In this paper, the behavior of policymakers in the face of currency shocks is analyzed by setting the monetary channel of the foreign exchange market pressure index in the central bank's policy function with a DSGE model. Accordingly, the exchange rate fluctuation has been compared in two policy functions of a stochastic dynamic equilibrium model created for Iran's economy. In the first model, monetary policy is adjusted in response to the foreign exchange market pressure index, and in the second model, sensitivity to the real exchange rate is embedded in the monetary policy response function. According to the results, inflation, production, consumption, and investment in exchange rate fluctuations in the first model have fewer fluctuations than the second model, and the economy reaches equilibrium in less time. Therefore, the effectiveness of monetary policy through sensitivity to foreign exchange market pressure will be greater than sensitivity to the real exchange rate. |
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Full-Text [PDF 1752 kb]
(304 Downloads)
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Type of Study: Empirical Study |
Subject:
International Finance (F3)
Received: 2021/01/9 | Accepted: 2021/05/22 | Published: 2021/11/17
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