Liquidity Management under Fixed Exchange Rate with Open Capital Account
IMF Working Papers, March 18, 2019
Source details
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- Liquidity Management under Fixed Exchange Rate with Open Capital Account
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Bibliographic details
- Authors: Mariam El Hamiani Khatat, Romain M Veyrune
- Published: March 18, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498302913.001
Overview and authorship
- Title: Liquidity Management under Fixed Exchange Rate with Open Capital Account
- Authors: Mariam El Hamiani Khatat, Romain M Veyrune
- Date: March 18, 2019
- Series: Working Paper No. 2019/058
- Issue: 058
- Volume: 2019
- Pages: 57
- DOI: https://doi.org/10.5089/9781498302913.001
- Stock No: WPIEA2019058
- ISBN: 9781498302913
- ISSN: 1018-5941
Theoretical framework
- Based on the price-specie flow mechanism of David Hume.
- Highlights the risk that short-term money market rates may un-anchor from the uncovered interest rate parity (UIP) because of money and foreign exchange market frictions.
- Emphasizes that such un-anchoring could jeopardize financial stability and market development.
Key findings
- Liquidity management under fixed exchange rate with an open capital account faces specific challenges:
- Larger liquidity shocks induced by foreign reserve swings that challenge the development of money markets.
- More complicated liquidity forecasts.
- The paper empirically tests the theoretical framework by estimating “offset” coefficients for Denmark and Hong Kong SAR.
- Operational solutions are discussed that aim to stabilize money market rates close to the level implied by UIP.
Policy implications and operational solutions
- Stabilize short-term money market rates close to the level implied by the Uncovered Interest Rate Parity (UIP).
- Implement liquidity management operations designed to offset liquidity shocks arising from FX reserve swings and capital account openness.
- Improve liquidity forecasting methods to account for larger and more complex shocks under a fixed exchange rate with an open capital account.
- Consider market development measures to strengthen money markets so they can absorb larger liquidity swings without rates un-anchoring.
Subject coverage and keywords
- Subjects: Asset and liability management, Banking, Conventional peg, Exchange rate arrangements, Financial markets, Foreign exchange, Liquidity management, Money markets
- Keywords: autonomous factors, capital account, central bank, central bank liquidity management, Conventional peg, country risk, discount window, excess reserves, exchange rate, Exchange rate arrangements, Fixed exchange rate regime, FX intervention, Global, interest rate, liquidity absorption operation, Liquidity management, liquidity shock, liquidity-providing operation, monetary operations, money and foreign exchange markets, money demand, money market rate, Money markets, offset coefficients, price-specie flow mechanism, rate, supply curve, uncovered interest rate parity, WP
Source: IMF Working Papers — "Liquidity Management under Fixed Exchange Rate with Open Capital Account" by Mariam El Hamiani Khatat and Romain M Veyrune, March 18, 2019.
Content in this bundle
- Working Paper