Systematic Foreign Exchange Intervention and Macroeconomic Stability: A Bayesian DSGE Approach

This study quantitatively assesses the role of foreign exchange interventions (FXIs) by introducing a systematic FXI policy that follows a feedback rule responding to nominal FX rates into a small open-economy DSGE model. A quantitative analysis using Vietnamese data reveals that while the systematic FXI policy amplifies the effects of productivity shocks due to the lack of FX flexibility, it contributes to macroeconomic stability overall by insulating an economy from external shocks. The real FX rate, which is modeled as a non-stationary variable on the balanced-growth path, is mainly accounted for by productivity shocks, in contrast with the exchange rate disconnect but consistent with the Balassa-Samuelson relationship.