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Countering Appreciation Pressure with Unconventional Monetary Policy: The Role of Financial Frictions

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  • Nicole Aregger

    (UBS)

  • Jessica Leutert

    (Swiss National Bank)

Abstract

In a simple two-country framework with imperfect financial intermediation we analyze and compare the effectiveness of two unconventional monetary policy measures: foreign exchange interventions and credit easing. Central bank interventions only have real effects when banks are financially constrained. For a country facing excess demand for its bonds, we study three external sources of appreciation pressure: increased financial frictions in the international credit market, an increase in capital inflows, and increased financial frictions in the foreign investment market. Only in the first two cases, foreign exchange interventions can reverse the appreciation and the resulting misallocation of capital. Under certain conditions, credit easing is a substitute for foreign exchange interventions.

Suggested Citation

  • Nicole Aregger & Jessica Leutert, 2023. "Countering Appreciation Pressure with Unconventional Monetary Policy: The Role of Financial Frictions," International Journal of Central Banking, International Journal of Central Banking, vol. 19(4), pages 251-337, October.
    • Handle: RePEc:ijc:ijcjou:y:2023:q:4:a:7
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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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