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Sterilization costs and exchange rate targeting

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  • Kletzer, Kenneth
  • Spiegel, Mark M.

Abstract

This paper examines the movements of exchange rates and capital flows in an environment where an optimizing central bank pursuing the joint goals of inflation and output targeting engages in costly sterilization activities. Our results predict that when faced with increased sterilization costs, the central bank will choose to limit its sterilization activities allowing target variables, such as the nominal exchange rate, to adjust. ; We then test the predictions of a linearized version of the saddle-path solution to the model for a cross-country panel of developing countries. We use IV, GMM and simultaneous equation specifications to allow for the endogeneity of capital inflows. Our results confirm that a monetary policy does respond to sterilization costs.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 23 (2004)
Issue (Month): 6 (October)
Pages: 897-915

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Handle: RePEc:eee:jimfin:v:23:y:2004:i:6:p:897-915

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Web page: http://www.elsevier.com/locate/inca/30443

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References

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  1. Robert Dekle & Kenneth Kletzer, 2003. "The Japanese Banking Crisis and Economic Growth: Theoretical and Empirical Implications of Deposit Guarantees and Weak Financial Regulation," CIRJE F-Series CIRJE-F-225, CIRJE, Faculty of Economics, University of Tokyo.
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Cited by:
  1. Li, Jie & Rajan, Ramkishen S., 2006. "Can High Reserves Offset Weak Fundamentals? A Simple Model of Precautionary Demand for Reserves," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 59(3), pages 317-328.
  2. Ljungwall, Christer & Xiong, Yi & Yutong, Zou, 2013. "Central bank financial strength and the cost of sterilization in China," China Economic Review, Elsevier, vol. 25(C), pages 105-116.
  3. David Hauner, 2006. "A Fiscal Price Tag for International Reserves," International Finance, Wiley Blackwell, vol. 9(2), pages 169-195, 08.
  4. Bank for International Settlements, 2013. "Central bank finances," BIS Papers, Bank for International Settlements, number 71.
  5. Ljungwall, Christer & Xiong, Yi & Zou, Yutong, 2009. "Central Bank Financial Strength And The Cost Of Sterilization In China," Working Paper Series, China Economic Research Center, Stockholm School of Economics 2009-8, China Economic Research Center, Stockholm School of Economics.

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