Exchange rate interventions and inflation expectations in an inflation targeting economy

Abstract

In this paper we explore the impact of exchange rate interventions on inflation expectations and exchange rate returns in Chile. We consider two episodes of preannounced central bank interventions during the sample period 2007–2012. Our analysis indicate that the interventions did have an impact on daily exchange rate returns, especially on the day after the announcements of the intervention programs. In terms of inflation expectations, we find that the intervention program carried out in 2008 had a significant, but relatively short-lived, impact on the distribution of inflation expectations at long horizons. In contrast, the intervention carried out in 2011 shows no relevant impact on the distribution of inflation expectations in Chile. A daily analysis using break-even inflation rate as a proxy for inflation expectations is roughly consistent with these results.