Abstract
In recent literature, several theories have suggested that emerging markets (EMs) are exposed to spillovers from US monetary policy. There has also been a recent in- crease in Foreign Exchange Intervention implemented by EM policymakers such as those in Argentina, Chile, and Turkey. Yet, theory about such interventions has found no real effectiveness on the exchange rate or domestic variables. To explain the rea- soning of such policymakers and the data, this paper develops a two-country New Keynesian model with imperfect financial markets, dollar-denominated debt and ster- ilized foreign exchange intervention policy. The model finds both short and long term effects of intervention on real exchange rates, PPI-inflation and trade balance with an interesting spill-back effect to US CPI-inflation.