This paper analyses time-inconsistency problems related to the exchange rate channel of monetary policy. Within a simple open-economy macroeconomic model, where the exchange rate is the only forward-looking variable, we show that a difference emerges between optimal policy under discretion and...

We provide a theory on currency dynamics, capital flows and conditions for emerging market economy central bank asset purchases to leave room for manoeuvre for conventional monetary policy. Local-currency asset purchases ease financial conditions and boost banks’ foreign borrowing capacity....

We provide a theory on currency dynamics, capital flows and conditions for central bank asset purchases to leave room for manoeuvre on conventional monetary policy. Asset purchases ease financial conditions and boost banks’ foreign borrowing capacity. The ensuing capital inflows lead to an...