Limits of Monetary Policy Autonomy and Exchange Rate Flexibility by East Asian Central Banks
AbstractGiven low interest rates in the large industrial countries and buoyant capital inflows into the emerging markets East Asian central banks have accumulated large stocks of foreign reserves. As the resulting easing of monetary conditions has become a threat to domestic price and financial stability, the East Asian central banks have embarked on substantial sterilization operations to absorb what we call 'surplus liquidity' from the domestic banking systems. This has brought the East Asian central banks into debtor positions versus the domestic banking systems. We show based on a central bank loss function that given buoyant capital inflows and exchange rate stabilization the absorption of surplus liquidity leads either to financial repression, or rising inflation or both. Assuming that a debtor central bank moved towards a freely floating exchange rate to gain monetary policy independence, we show that monetary policy independence is undermined by sterilization costs and revaluation losses on foreign reserves.
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Bibliographic InfoPaper provided by Friedrich-Schiller-University Jena in its series Global Financial Markets Working Paper Series with number 48-2013.
Date of creation: 22 Aug 2013
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Debtor Central Banks; Monetary Policy Autonomy; Sterilization; Exchange Rate Regime; East Asia;
Other versions of this item:
- Loeffler, Axel & Schnabl, Gunther & Schobert, Franziska, 2013. "Limits of monetary policy autonomy and exchange rate flexibility by East Asian central banks," Working Papers 122, University of Leipzig, Faculty of Economics and Management Science.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-26 (All new papers)
- NEP-CBA-2013-09-26 (Central Banking)
- NEP-CWA-2013-09-26 (Central & Western Asia)
- NEP-MAC-2013-09-26 (Macroeconomics)
- NEP-MON-2013-09-26 (Monetary Economics)
- NEP-SEA-2013-09-26 (South East Asia)
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