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Capital Mobility and the Scope for Sterilization: Mexico in the 1970s

In: Financial Policies and the World Capital Market: The Problem of Latin American Countries

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  • Robert E. Cumby
  • Maurice Obstfeld

Abstract

This paper is an empirical study of the Banco de Mexico's monetary policy during the 1970s. In particular, it studies the Mexican monetary equilibria and the extent to which capital mobility undermined monetary control. Estimates of a Banco de Mexico reaction function suggest that the Mexican central bank attempted to sterilize reserve flows through offsetting movements in domestic credit, at least over the second half of the decade. This finding suggests that estimates of the capital-account response to domestic credit expansion should be derived from a structural model, and we accordingly estimate an aggregative three-equation model of Mexican financial markets. The paper distinguishes between the short-run or one-quarter capital-account offset and a hypothetical long-run offset that would obtain under instantaneous asset-market adjustment. The model implies that, depending on the method of monetary expansion, between 30 and 50 percent of an expansion in domestic credit was offset by capital outflow in the same quarter. The implied long-run offsets range from 50 to 76 percent. These offset coefficients indicate that the Banco de Mexico's monetary control was exercised at a substantial cost in terms of reserve volatility.

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This chapter was published in:

  • Pedro Aspe Armella & Rudiger Dornbusch & Maurice Obstfeld, 1983. "Financial Policies and the World Capital Market: The Problem of Latin American Countries," NBER Books, National Bureau of Economic Research, Inc, number arme83-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11195.

    Handle: RePEc:nbr:nberch:11195

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Maurice Obstfeld & Robert E. Cumby & John Huizinga, 1983. "Two-Step Two-Stage Least Squares Estimation in Models with Rational Expectations," NBER Technical Working Papers 0011, National Bureau of Economic Research, Inc.
    2. Murray, Gordon L, 1978. "Monetary Policy and Capital Inflow," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 54(146), pages 271-80, August.
    3. Kouri, Pentti J K & Porter, Michael G, 1974. "International Capital Flows and Portfolio Equilibrium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(3), pages 443-67, May/June.
    4. Frenkel, Jacob A & Glyfason, Thorvaldur & Helliwell, John F, 1980. "A Synthesis of Monetary and Keynesian Approaches to Short-Run Balance-of-Payments Theory," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(359), pages 582-92, September.
    5. Miller, Norman C & Askin, Sherry S, 1976. "Monetary Policy and the Balance of Payments in Brazil and Chile," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 8(2), pages 227-38, May.
    6. Eliana A. Cardoso & Rudiger Dornbusch, 1980. "Three Papers on Brazilian Trade and Payments," NBER Working Papers 0541, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Maurice Obstfeld, 1982. "Can We Sterilize? Theory and Evidence," NBER Working Papers 0833, National Bureau of Economic Research, Inc.
    2. De La Cruz Martinez, Justino, 1999. "Mexico's balance of payments and exchange rates: a cointegration analysis," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 10(2), pages 401-421.
    3. Marcos Buscaglia, 2004. "Sterilization of Capital Inflows and Balance of Payments Crises," Econometric Society 2004 Latin American Meetings, Econometric Society 189, Econometric Society.
    4. Wu, Ying, 1999. "More on monetary policy in a small open economy A credit view," International Review of Economics & Finance, Elsevier, Elsevier, vol. 8(2), pages 223-235, June.
    5. Asad Jan & Ather Elahi & M. A. Zahid, 2005. "Managing Foreign Exchange Inflows: An Analysis of Sterilisation in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 44(4), pages 777-792.

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