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Sterilization and Offsetting Capital Movements: Evidence from West Germany, 1960-1970

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  • Maurice Obstfeld

Abstract

The purpose of this paper is two fold. First, to estimate, using structural methods, the extent to which capital flows undermined West German monetary policy during the Bretton Woods years 1960 to 1970 and second, to show that earlier reduced form estimates of the capital-account offset coefficient are tainted by simultaneity bias thanks to the Deutsche Bundesbank's systematic policy of sterilization, and so overestimate the true coefficient. The paper distinguishes between the short-run or one-quarter offset coefficient and the long-run coefficient implied by the full adjustment of all asset markets. An aggregative structural model German financial markets yields short-run coefficients between .50 and .65implying substantial Bundesbank control over the monetary base, at least in the short-run. A formal test for simultaneous-equations bias provides evidence that variations in domestic credit cannot be regarded as exogenous and that equations regressing capital flows on changes in domestic credit and other variables exaggerate the extent of the offset.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0494.

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Date of creation: Jun 1980
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Handle: RePEc:nbr:nberwo:0494

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  1. Modigliani, Franco & Rasche, Robert & Cooper, J Philip, 1970. "Central Bank Policy, the Money Supply, and the Short-Term Rate of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 2(2), pages 166-218, May.
  2. Godfrey, Leslie G, 1978. "A Note on the Use of Durbin's h Test When the Equation is Estimated by Instrumental Variables," Econometrica, Econometric Society, Econometric Society, vol. 46(1), pages 225-28, January.
  3. Michael G. Porter, 1972. "Capital Flows as an Offset to Monetary Policy: The German Experience (Les flux de capitaux peuvent-ils mettre en échec la politique monétaire? L'expérience allemande) (Los flujos de capital c," IMF Staff Papers, Palgrave Macmillan, vol. 19(2), pages 395-424, July.
  4. Murray, Gordon L, 1978. "Monetary Policy and Capital Inflow," The Economic Record, The Economic Society of Australia, vol. 54(146), pages 271-80, August.
  5. John Hewson & Eisuke Sakakibara, 1977. "The effectiveness of German controls on capital inflow," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 113(4), pages 645-666, December.
  6. 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.
  7. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1251-71, November.
  8. Manfred Willms, 1971. "Controlling money in an open economy: the German case," Review, Federal Reserve Bank of St. Louis, issue Apr, pages 10-27.
  9. Neumann, Manfred J. M., 1978. "Offsetting capital flows : A reexamination of the German case," Journal of Monetary Economics, Elsevier, Elsevier, vol. 4(1), pages 131-142, January.
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