Central Banking in an Open Economy

At first glance, the reader may think that there is little connection between the empirical study of Bordo, Humpage, and Schwartz of the effect of foreign exchange market interventions by the Federal Reserve during 1973–1995 and the Glocker and Towbin quantitative DSGE model of reserve requirements in a small open economy with financial frictions.1 However, there are key links. Each study examines important aspects of central banking policy in open economies. Each also examines a basic intervention that is not monetary policy: a foreign exchange intervention that is sterilized in BHS and a broad-based requirement that financial institutions hold reserve (liquid) assets in GT. These papers are part of the large and broad research stimulated by financial crisis and the zero lower bound on the nominal interest rate, thus necessarily concerning issues that border on macro and finance. The final and arguably most important link is that each paper has implications for the conduct of monetary policy.