Foreign exchange interventions and current account global imbalances

Abstract

The aim of this thesis is to analyze two macroeconomic topics that have become relevant in the last years. The first one is the Foreign Exchange Intervention (FEI), which has been widely used as a tool of monetary policy in the world in the last century by most of the central banks. Basically, it consists in influencing the nominal and real exchange rates by buying and selling currencies in the foreign exchange market. Overall, it seems that this mechanism has been efficient at boosting the local economies and has helped to achieve the policy objectives set by central banks. However, political tension may arise between nations, as currency wars and retaliations may emerge if coordination between countries is not reached. The second topic that we will discuss are current account global imbalances, which consists in those situations in which a group of countries have significant and increasing current account surplus and other few nations run the corresponding current account deficits. We will argue that global imbalances cannot last forever and that international cooperation seems to be one of the best ways to reduce them without generating harmful consequences in the global economy.