Capital Inflows, Sterilization, and Commercial Bank Speculation
AbstractThe paper analyzes the relationship between large-scale capital inflows and sterilization efforts in the Czech Republic during 1993–96 using a vector autoregression (VAR) model, which consists of domestic credit, foreign reserves, and domestic and foreign interest rates. The analysis finds that despite initial success in sterilizing capital inflows, this strategy proved increasingly costly and ultimately unsustainable as domestic interest rates attracted more capital inflows. The commercial banks exploited a profitable sterilization game, whereby they borrowed cheaply abroad and invested the funds domestically in high-yielding sterilization bonds.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 04/218.
Date of creation: 01 Nov 2004
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