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Monetary sterilization and dual nominal anchors: some Caribbean examples

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  • Khemraj, Tarron
  • Pasha, Sukrishnalall

Abstract

This paper notes that a high sterilization coefficient plus a de facto pegged exchange rate indicates the existence of dual nominal anchors. The econometric evidence presented shows that several Caribbean economies with fixed exchange rate regimes also possess high sterilization coefficients. Given open capital accounts in the various economies, the paper argues that this finding contravenes the money neutrality thesis, which holds that only one nominal anchor can prevail in the long-term. The paper presents a simple theoretical model to explain this phenomenon. The model combines the liquidity preference of commercial banks with an augmented uncovered interest parity equation.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34503.

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Date of creation: 01 Mar 2011
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Handle: RePEc:pra:mprapa:34503

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Keywords: sterilization coefficient; dual nominal anchors; foreign exchange regime;

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  1. Joshua Aizenman & Reuven Glick, 2008. "Sterilization, monetary policy, and global financial integration," Working Paper Series 2008-15, Federal Reserve Bank of San Francisco.
  2. Pierre L. Siklos, 2000. "Capital flows in a transitional economy and the sterilization dilemma: The hungarian experience, 1992-97," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 3(4), pages 373-392.
  3. DeLisle Worrell & Roland Craigwell & Travis Mitchell, 2008. "The behaviour of a small foreign exchange market with a long-term peg-Barbados," Applied Financial Economics, Taylor & Francis Journals, vol. 18(8), pages 673-682.
  4. Khatkhate, Deena R. & Short, Brock K., 1980. "Monetary and central banking problems of mini states," World Development, Elsevier, vol. 8(12), pages 1017-1025, December.
  5. Piti Disyatat & Gabriele Galati, 2005. "The effectiveness of foreign exchange intervention in emerging market countries," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 97-113 Bank for International Settlements.
  6. Jeffrey A. Frankel, 1997. "Sterilization of money inflows: Difficult (Calvo) or Easy (Reisen)?," Estudios de Economia, University of Chile, Department of Economics, vol. 24(2 Year 19), pages 263-285, December.
  7. Roland Craigwell & Kevin Greenidge & Harold Codrington & DeLisle Worrell, 2003. "Economic Resilience with An Exchange Rate Peg," IMF Working Papers 03/168, International Monetary Fund.
  8. Winston Moore & Roland Craigwell, 2002. "Market Power and Interest Rate Spreads in the Caribbean," International Review of Applied Economics, Taylor & Francis Journals, vol. 16(4), pages 391-405.
  9. Bank for International Settlements, 2008. "Monetary and financial stability implications of capital flows in Latin America and the Caribbean," BIS Papers, Bank for International Settlements, number 43, May.
  10. M S Mohanty & Philip Turner, 2005. "Intervention: what are the domestic consequences?," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 56-81 Bank for International Settlements.
  11. Brissimis, Sophocles N & Gibson, Heather D & Tsakalotos, Euclid, 2002. "A Unifying Framework for Analysing Offsetting Capital Flows and Sterilization: Germany and the ERM," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(1), pages 63-78, January.
  12. 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.
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