Has Foreign Exchange Intervention in the U.S. Been Optimal?

Abstract

This analysis develops a linearized open economy macroeconomic model in order to evaluate U.S. foreign exchange policy. The model is estimated for the United States and then used in conjunction with a quadratic performance index in order to produce optimal international reserve policy simulations within a stochastic linear-quadratic framework. The optimality of U.S. policy is assessed by comparing the simulated reserve policy trajectories to the actual trajectories.