We incorporate terms-of-trade externality into a small open economy featuring an incomplete market, sterilized intervention, and capital controls as in Chang et al. (2015), and we highlight the central banks reaction to exchange rate movement. Our calibrated model using data from China shows...

In recent decades, there has been a rising share of countries with limited exchange rate flexibility (Ilzetzki et al., 2019), and foreign exchange (FX) intervention is commonly used among emerging market economies. Yet, the positive and normative implications of central banks' FX intervention...