TITLE:
Dynamic Currency Intervention and International Monetary Neutrality
AUTHORS:
Hailong Jin, Tong Wang
KEYWORDS:
Currency Intervention, Capital Control, General Equilibrium, Monetary Neutrality
JOURNAL NAME:
Theoretical Economics Letters,
Vol.7 No.3,
April
20,
2017
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.