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Sterilization of capital inflows through the banking sector: evidence from Asia

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  • Mark M. Spiegel

Abstract

This paper develops an open-economy version of the Bernanke-Blinder model which indicates that sterilization efforts through increases in reserve requirements will have limited impact if viable financial alternatives to the commercial banking sector exists. We then examine the capital inflow surge experiences of seven developing Asian nations. Our analysis yields three stylized conclusions: First, the timing of capital inflow surges indicates a causal role for both domestic and foreign factors. Second, there is little general rule as to the most effective sterilization instrument. Finally, the experiences of the developing nations during their capital inflow surge period largely coincide with the predictions of the model. Korea, the country with the largest nonbank financial sector, had the least success in stemming the impact of capital inflow surges despite intervention through both open market operations and increased reserve requirements. ; Published in FRBSF Economic Review (1995, no. 3, p 17-34)

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 95-06.

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Date of creation: 1995
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Handle: RePEc:fip:fedfpb:95-06

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Keywords: Capital movements ; Bank reserves ; Developing countries ; Asia ; Pacific Area;

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  1. Van Wijnbergen, S., 1983. "Interest rate management in LDC's," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 433-452, September.
  2. Menzie Chinn & Michael Dooley, 1995. "National, regional and international capital markets: Measurement and implications for domestic financial fragility," International Finance 9508006, EconWPA.
  3. Jeffrey A. Frankel, 1997. "Sterilization of money inflows: Difficult (Calvo) or Easy (Reisen)?," Estudios de Economia, University of Chile, Department of Economics, vol. 24(2 Year 19), pages 263-285, December.
  4. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May.
  5. Chuhan, Punam & Claessens, Stijn & Mamingi, Nlandu, 1998. "Equity and bond flows to Latin America and Asia: the role of global and country factors," Journal of Development Economics, Elsevier, vol. 55(2), pages 439-463, April.
  6. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
  7. Reuven Glick & Ramon Moreno, 1994. "Capital flows and monetary policy in East Asia," Pacific Basin Working Paper Series 94-08, Federal Reserve Bank of San Francisco.
  8. Reinhart, Carmen & Khan, Mohsin, 1995. "Macroeconomic Management in APEC Economies: The Response to Capital Inflows," MPRA Paper 8148, University Library of Munich, Germany.
  9. Lamberte, Mario B., 1994. "Managing Surges in Capital Inflows: The Philippines Case," Discussion Papers DP 1994-20, Philippine Institute for Development Studies.
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