Capital Flows and Money Supply: The Degree of Sterilisation in Pakistan
AbstractUnder the current managed float exchange rate system; the central bank may respond to an exchange market disequilibria by changing either the international reserves or the exchange rates. Under such a regime, a major policy difficulty is the interaction between exchange rate policies and monetary policies. The monetary authorities intervene in the exchange market in response to undesired fluctuations in exchange rates,1 could adversely affect monetary control and move the economy away from internal target such as price stability. Under such a policy dilemma, fully sterilised intervention2 involves a pure swap of foreign and domestic assets, which have not effect on the money supply, received greater attention by the policy-makers in early 1980s, particularly, through the experience of West Germany [Obstfeld (1983)]. Ideally, it provides an independent policy tool to deal with the exchange rate without affecting the internal policy targets. Moreover, it is argues that fully sterilised intervention insulate domestic policies completely from balance of payments considerations. Further, the effects of intervention on exchange rates are close to zero if intervention is completely sterilised. Given this conviction, it is hard to see why the central bank would intervene in the foreign exchange market and sterilised completely at the same time [Neumann (1984)]. It is further argued that sterilisation is capable to move exchange rates through either a portfolio or signaling channel. In developing countries, an intervention may not be used purely to stabilise exchange rate but to reduce its impacts of volatile exchange rates on price level.
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Bibliographic InfoArticle provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.
Volume (Year): 42 (2003)
Issue (Month): 4 ()
Other versions of this item:
- Qayyum, Abdul & Khan, Arshad, 2003. "Capital Flows and Money Supply: The Degree of Sterilisation in Pakistan," MPRA Paper 2150, University Library of Munich, Germany, revised 2003.
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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