Exchange Rate Policies at the Zero Lower Bound

Manuel Amador, Javier Bianchi, Luigi Bocola, Fabrizio Perri

Research output: Contribution to journalArticlepeer-review

12 Scopus citations


We study the problem of a monetary authority pursuing an exchange rate policy that is inconsistent with interest rate parity because of a binding zero lower bound constraint. The resulting violation in interest rate parity generates an inflow of capital that the monetary authority needs to absorb by accumulating foreign reserves. We show that these interventions by the monetary authority are costly, and we derive a simple measure of these costs: they are proportional to deviations from the covered interest parity (CIP) condition and the amount of accumulated foreign reserves. Our framework can account for the recent experiences of "safe-haven"currencies and the sign of their observed deviations from CIP.

Original languageEnglish (US)
Pages (from-to)1605-1645
Number of pages41
JournalReview of Economic Studies
Issue number4
StatePublished - Jul 1 2020

Bibliographical note

Publisher Copyright:
© 2019 The Author(s) 2019. Published by Oxford University Press on behalf of The Review of Economic Studies Limited.


  • CIP deviations
  • Capital flows
  • Currency pegs
  • F31
  • F32
  • F41
  • Foreign exchange interventions
  • International reserves


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