Central bank interventions in a dollarized economy: managed floating versus inflation targeting

Effects of interventions by the Banco Central de Reserva del Peru (BCRP) on the sol/USD exchange rate are studied. The BCRP is currently committed to following an inflation-targeting (IT) regime to intervene in the foreign exchange market only to reduce exchange-rate volatility and during specific segments of the day and to make these interventions public information. We find that interventions in the foreign exchange market by the BCRP have been effective in moving the sol/USD in the intended direction during both the past managed floating regime and the current IT regime. Interventions have, however, increased the volatility of the sol/USD, and this increase has continued very strongly under the IT regime. A conclusion is that the BCRP might not yet have gained a sufficiently strong reputation to effectively reduce the exchange-rate volatility.