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Limits of monetary policy autonomy and exchange rate flexibility by East Asian central banks

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  • Loeffler, Axel
  • Schnabl, Gunther
  • Schobert, Franziska

Abstract

Given low interest rates in the large industrial countries and buoyant capital inflows into the emerging markets East Asian central banks have accumulated large stocks of foreign reserves. As the resulting easing of monetary conditions has become a threat to domestic price and financial stability, the East Asian central banks have embarked on substantial sterilization operations to absorb what we call surplus liquidity from the domestic banking systems. This has brought the East Asian central banks into debtor positions versus the domestic banking systems. We show based on a central bank loss function that given buoyant capital inflows and exchange rate stabilization the absorption of surplus liquidity leads either to financial repression, or rising inflation or both. Assuming that a debtor central bank moved towards a freely floating exchange rate to gain monetary policy independence, we show that monetary policy independence is undermined by sterilization costs and revaluation losses on foreign reserves. --

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Bibliographic Info

Paper provided by University of Leipzig, Faculty of Economics and Management Science in its series Working Papers with number 122.

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Date of creation: 2013
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Handle: RePEc:zbw:leiwps:122

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Keywords: Debtor Central Banks; Monetary Policy Autonomy; Sterilization; Exchange Rate Regime; East Asia;

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  1. Andreas Hoffmann & Gunther Schnabl, 2007. "Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets – An Overinvestment View," CESifo Working Paper Series 2100, CESifo Group Munich.
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Cited by:
  1. Schnabl, Gunther, 2013. "The global move into the zero interest rate and high debt trap," Working Papers 121, University of Leipzig, Faculty of Economics and Management Science.

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