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Can We Sterilize? Theory and Evidence

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Maurice Obstfeld

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Abstract

This paper is a highly selective review of our knowledge about the scope for sterilized intervention in foreign exchange markets under alternative exchange-rate regimes. Section I demonstrates the potential importance of simultaneous-equations bias in single-equation econometric studies of the capital-account offset to monetary policy under fixed exchange rates. The empirical record suggests that, in the case of West Germany, sterilization was a feasible short-run monetary strategy in the 1960s. Section II notes that there is considerable recent evidence of imperfect asset substitutability under the managed float. While limited substitution between bonds of different currency denomination is a precondition for the efficacy of sterilized foreign-exchange intervention, it is no guarantee of efficacy. Whether limited substitutability can in fact be exploited in a predictable manner by central banks is a distinct, and unanswered, question.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0833.

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Date of creation: Jul 1982
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Handle: RePEc:nbr:nberwo:0833

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hakkio, Craig S., 1981. "The term structure of the forward premium," Journal of Monetary Economics, Elsevier, vol. 8(1), pages 41-58. [Downloadable!] (restricted)
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  2. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October. [Downloadable!] (restricted)
  3. Robert E. Cumby & Maurice Obstfeld, 1981. "Capital mobility and the scope for sterilization: Mexico in the 1970s," International Finance Discussion Papers 187, Board of Governors of the Federal Reserve System (U.S.).
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  4. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November. [Downloadable!] (restricted)
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  1. William H. Branson, 1982. "Exchange-Rate Policy After a Decade of "Floating"," NBER Working Papers 0909, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Nouriel Roubini, 1988. "Offset and Sterilization Under Fixed Exchange Rates With An Optimizing Central Bank," NBER Working Papers 2777, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Michael D. Bordo & Barry Eichengreen, 1997. "Implications of the Great Depression for the Development of the International Monetary System," NBER Working Papers 5883, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Sebastian Edwards & Fernando J. Losada, 1994. "Fixed Exchange Rates, Inflation and Macroeconomic Discipline," NBER Working Papers 4661, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. J. Stephen Ferris & Hossein Kavand, 2008. "The monetary effects arising from stochastic resource revenues and the subsidization of financial intermediation in resource rich developing economies," Carleton Economic Papers 08-05, Carleton University, Department of Economics. [Downloadable!]
  6. Alice Y. Ouyang & Ramkishen S. Rajan & Thomas D. Willett, 2007. "China as a Reserve Sink: The Evidence from Offset and Sterilization Coefficients," Working Papers 102007, Hong Kong Institute for Monetary Research. [Downloadable!]
  7. Reuven Glick & Michael Hutchison, 1989. "Exchange rates and monetary policy," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 17-29. [Downloadable!]
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