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Sterilization of Capital Inflows and Balance of Payments Crises

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  • Marcos Buscaglia
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    Abstract

    Large capital inflows and repeated balance of payments crises (BOPC) associated with their sudden reversal have characterized the emerging market economies during the 90's. Sterilized intervention has been the most common response to capital inflows. This paper links the sterilization efforts with BOPC in a general equilibrium model. We study an economy facing a temporary decrease in the international interest rate, and show that an attempt to sterilize capital inflows leads the economy to a BOPC, while a pure Currency Board would avoid it. We argue that this experiment is relevant to understand the 1994 Mexican currency crisis.

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    File URL: http://repec.org/esLATM04/up.15721.1081993132.pdf
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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 189.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:ecm:latm04:189

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    Keywords: Balance of Payments Crises; Sterilization of Capital Inflows; Mexican Crisis;

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    1. 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, October.
    2. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    3. Calvo, Guillermo A, 1987. "Balance of Payments Crises in a Cash-in-Advance Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 19-32, February.
    4. Robert E. Cumby & Maurice Obstfeld, 1981. "Capital mobility and the scope for sterilization: Mexico in the 1970s," International Finance Discussion Papers 187, Board of Governors of the Federal Reserve System (U.S.).
    5. Calvo, Guillermo A., 1987. "On the costs of temporary policy," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 245-261, October.
    6. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-29, December.
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