Offset and Sterilization Under Fixed Exchange Rates With An Optimizing Central Bank
AbstractThe traditional approach to the estimation of the offset and sterilization equations can be criticized for the ad-hoc specification of the reaction function of the monetary authorities and the endogeneity of the domestic credit and foreign reserve variables in the estimated equations. The paper proposes an alternative analytical model where the sterilization and offset equations are derived from an explicit maximization problem solved by the monetary authority. In such a model, the optimal intervention and sterilization policies of the monetary authority are shown to be dependent on the different disturbances hitting the economy and the preferences of the monetary authority. In particular, under a wide range of domestic and foreign disturbances the optimal response of the central bank will lead to negatively correlated comovements of domestic credit and foreign reserves if the cer1tral bank cares more about the interest rate smoothing objective relative to the foreign exchange reserve stabilization goal. Conversely, positive correlations between domestic credit and foreign reserves will be observed if the foreign reserve objective is dominant.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2777.
Date of creation: Nov 1988
Date of revision:
Note: ITI IFM
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
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.:
- Maurice Obstfeld, 1982.
"Can We Sterilize? Theory and Evidence,"
NBER Working Papers
0833, National Bureau of Economic Research, Inc.
- Neumann, Manfred J. M., 1984. "Intervention in the mark/dollar market: the authorities' reaction function," Journal of International Money and Finance, Elsevier, vol. 3(2), pages 223-239, August.
- Kouri, Pentti J K & Porter, Michael G, 1974. "International Capital Flows and Portfolio Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 443-67, May/June.
- Marston, Richard C., 1980. "Cross country effects of sterilization, reserve currencies, and foreign exchange intervention," Journal of International Economics, Elsevier, vol. 10(1), pages 63-78, February.
- Kouri, Pentti J. K., 1975. "The hypothesis of offsetting capital flows : A case study of Germany," Journal of Monetary Economics, Elsevier, vol. 1(1), pages 21-39, January.
- Aoki, Masanao, 1977. "A note on the stability of the interaction of monetary policies," Journal of International Economics, Elsevier, vol. 7(1), pages 81-94, February.
- Robert J. Barro, 1989. "Interest-Rate Smoothing," NBER Working Papers 2581, National Bureau of Economic Research, Inc.
- Vaubel, Roland, 1980. "The return to the new european monetary system : Objectives, incentives, perspectives," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 13(1), pages 173-221, January.
- Herring, Richard J. & Marston, Richard C., 1977. "Sterilization policy: The trade-off between monetary autonomy and control over foreign exchange reserves," European Economic Review, Elsevier, vol. 10(3), pages 325-343.
- Neumann, Manfred J. M., 1978. "Offsetting capital flows : A reexamination of the German case," Journal of Monetary Economics, Elsevier, vol. 4(1), pages 131-142, January.
- Keltzer, K. & Spiegel, M., 1999.
"Sterilization Costs and Exchange Rate Targeting,"
pb99-03, Economisch Institut voor het Midden en Kleinbedrijf-.
- Caprio, Gerard & Honohan, Patrick, 1990. "Monetary policy instruments for developing countries," Policy Research Working Paper Series 528, The World Bank.
- Eichengreen, Barry, 1989.
"International Monetary Stability Between the Wars: Structural Flaws or Misguided Policies?,"
CEPR Discussion Papers
348, C.E.P.R. Discussion Papers.
- Barry Eichengreen, 1991. "International Monetary Instability Between the Wars: Structural Flaws or Misguided Policies?," NBER Working Papers 3124, National Bureau of Economic Research, Inc.
- Eichengreen, Barry, 1989. "International Monetary Istability Between the Wars: Structural Flaws or Misguided Policies?," Department of Economics, Working Paper Series qt5r60q801, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Barry Eichengreen., 1989. "International Monetary Instability Between the Wars: Structural Flaws or Misguided Policies?," Economics Working Papers 89-118, University of California at Berkeley.
- Johannes Groeneveld, 1998. "From the ERM with Love: Monetary Spillover Effects to Austria," Empirica, Springer, vol. 25(3), pages 331-345, January.
- Hans Groeneveld, 1995. "Monetary spill-over effects in the ERM: The case of Austria, a former shadow member," Working Papers 20, Oesterreichische Nationalbank (Austrian Central Bank).
- Gyuhan Kim, 1995. "Exchange rate constraints and money control in Korea," Working Papers 1995-011, Federal Reserve Bank of St. Louis.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.