Dynamic Currency Intervention and International Monetary Neutrality
- 1 South Dakota State University, Brookings, USA
- 2 South Dakota State University, Brookings, USA
Abstract
Modeling the regime of long run exchange rate and capital account intervention, or dynamic currency intervention (DCI), widely adopted by emerging economies, is of great importance to international economists. This paper develops a new dynamic general equilibrium model to probe the key mechanism of a DCI regime. We show clear drawbacks of models investigating the two crucial features of DCI separately. On one side, the fast capital market adjustment assumption in existing exchange rate intervention models may not be true for a long run capital market intervention economy. On the other side, the monetary neutrality treatment in long run capital control models can be violated in a strict exchange rate intervention country. Having addressed both issues, the new model in this paper provides an important reference to study the key mechanism of a DCI economy comprehensively.
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