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.
Authors
- Nicole Aregger
- Jessica Leutert
JEL codes
- E52
- F31
- F32
- F41
- G15
- G20