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Capital Inflows, Sterilization, and Commercial Bank Speculation

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  • Jakob Christensen
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    Abstract

    The 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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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=17537
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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/218.

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    Length: 29
    Date of creation: 01 Nov 2004
    Date of revision:
    Handle: RePEc:imf:imfwpa:04/218

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    Related research

    Keywords: Capital inflows; Commercial banks; Economic models; domestic credit; monetary policy; short-term capital inflows; monetary fund; monetary authorities; monetary independence; foreign capital; domestic bonds; inflation; money supply; capital flows; short-term capital; central bank; current account deficit; capital mobility; money stock; domestic money supply; capital inflow; foreign bonds; monetary approach; money market; money demand; reserve requirements; monetary control; composition of capital inflows; monetary expansion; monetary base; capital account convertibility; international capital flows; private capital inflows; national bank; capital controls; net capital; capital control; management of capital inflows; speculative capital inflows; international capital; monetary factors; monetary response; monetary statistics; capital flow; net capital flow; speculative capital; monetary stability; monetary stance; current account deficits; capital account liberalisation; private capital; tight monetary policy; monetary aggregates; monetary impact; demand for money; inflation rate; capital accounts; speculative attacks;

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    1. Leiderman, Leonardo, 1984. "On the monetary-macro dynamics of Colombia and Mexico," Journal of Development Economics, Elsevier, Elsevier, vol. 14(1), pages 183-201.
    2. 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.
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    Cited by:
    1. Luis F. Brunstein, 2008. "Policies to reduce instability," REVISTA DE ECONOMÍA DEL CARIBE, UNIVERSIDAD DEL NORTE.

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