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<p>This paper shows that foreign exchange intervention (FXI) can serve as a quantitatively relevant stabilization instrument in small open economies when embedded within a coherent monetary policy framework. Using a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model calibrated to the ASEAN-4 economies, the analysis clarifies the distinct macroeconomic transmission mechanisms of capital flow and risk premium shocks. Capital flow shocks generate pronounced exchange rate depreciation and output losses through both external and domestic channels, whereas risk premium shocks are largely absorbed within financial markets, with limited spillovers to real activity. Policy simulations indicate that a disciplined, rule-based combination of moderate FXI (<InlineEquation ID="IEq1"> <EquationSource Format="TEX">\(\:{\uppsi\:}=0.2\)</EquationSource> </InlineEquation>) and inflation targeting (<InlineEquation ID="IEq2"> <EquationSource Format="TEX">\(\:{{\upvarphi\:}}_{{\uppi\:}}=1.5\)</EquationSource> </InlineEquation>) delivers effective exchange rate smoothing and output stabilization without compromising price stability. More aggressive intervention yields limited additional macroeconomic benefits while increasing central bank balance-sheet exposure. These results provide formal quantitative backing for the IMF’s Integrated Policy Framework and underscore the welfare advantages of multi-instrument policy coordination in financially open emerging markets.</p>

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Who absorbs external shocks? foreign exchange intervention, monetary policy, and stabilization trade-offs: a DSGE study of ASEAN economies

  • 期刊论文

  • 发表日期：

    2026年1月26日

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  • Tidiane Guindo

摘要

This paper shows that foreign exchange intervention (FXI) can serve as a quantitatively relevant stabilization instrument in small open economies when embedded within a coherent monetary policy framework. Using a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model calibrated to the ASEAN-4 economies, the analysis clarifies the distinct macroeconomic transmission mechanisms of capital flow and risk premium shocks. Capital flow shocks generate pronounced exchange rate depreciation and output losses through both external and domestic channels, whereas risk premium shocks are largely absorbed within financial markets, with limited spillovers to real activity. Policy simulations indicate that a disciplined, rule-based combination of moderate FXI ( \(\:{\uppsi\:}=0.2\) ) and inflation targeting ( \(\:{{\upvarphi\:}}_{{\uppi\:}}=1.5\) ) delivers effective exchange rate smoothing and output stabilization without compromising price stability. More aggressive intervention yields limited additional macroeconomic benefits while increasing central bank balance-sheet exposure. These results provide formal quantitative backing for the IMF’s Integrated Policy Framework and underscore the welfare advantages of multi-instrument policy coordination in financially open emerging markets.