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A note on optimal foreign reserve management without commitment

Published online by Cambridge University Press:  11 August 2025

Min Kim Open the ORCID record for Min Kim [Opens in a new window]
Min Kim*
Affiliation:
International Department, Bank of Korea, Seoul, Korea
*
Email: minkim.econ@gmail.com
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Abstract

This paper examines optimal policy for foreign exchange (FX) reserve management without commitment. The stylized linear-quadratic model incorporates three key elements: (i) fear of floating, (ii) forward-looking exchange rates, and (iii) the cost of reserve management. The paper first analyzes two benchmark optimal policies: the Ramsey policy (with commitment) and the Markov-Perfect policy (without commitment). It then proposes a sustainable plan that addresses the time inconsistency in reserve management. By following this plan, the government without commitment achieves the Ramsey outcome in equilibrium.

Keywords

Foreign exchange reservesExchange ratesTime-inconsistencyRamsey policyMarkov-Perfect policySustainable plan

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Macroeconomic Dynamics , Volume 29 , 2025 , e128
Copyright
© The Author(s), 2025. Published by Cambridge University Press

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