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The sustainability of monetary sterilization policies

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  • Frenkel, Roberto

Abstract

The focus of this paper is on policies that set out simultaneously tocontrol the exchange rate and monetary conditions (an instrument interestrate, for example); in situations where capital mobility is unrestricted, thereis an excess supply of international currency and the central bank setstargets for the exchange rate and interest rate. The paper calculates howhigh the local interest rate can go at any time without rendering monetarysterilization policy unsustainable, defines the degree of monetary autonomyas the difference between this rate on the one hand and the sum of theinternational interest rate and the rate of increase in the exchange rate onthe other, and analyses how the degree of autonomy evolves. Numericalexamples using data from Argentina and elsewhere suggest that sterilizationpolicy is sustainable and that a considerable degree of monetary autonomyexists in contexts that are by no means unusual in many developingeconomies.

Suggested Citation

  • Frenkel, Roberto, 2007. "The sustainability of monetary sterilization policies," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    • Handle: RePEc:ecr:col070:11230
    Note: Includes bibliography
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    File URL: http://repositorio.cepal.org/handle/11362/11230
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    References listed on IDEAS

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    1. Peter Bofinger & Timo Wollmershäuser, 2003. "Managed Floating as a Monetary Policy Strategy," Economic Change and Restructuring, Springer, vol. 36(2), pages 81-109, June.
    2. Ronald McKinnon & Gunther Schnabl, 2006. "China's Exchange Rate and International Adjustment in Wages, Prices and Interest Rates: Japan Déjà Vu?," CESifo Economic Studies, CESifo, vol. 52(2), pages 276-303, June.
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    Cited by:

    1. Roberto Frenkel & Martin Rapetti, 2010. "A Concise History of Exchange Rate Regimes in Latin America," UMASS Amherst Economics Working Papers 2010-01, University of Massachusetts Amherst, Department of Economics.
    2. Rapetti Martin, 2013. "Macroeconomic Policy Coordination in a Competitive Real Exchange Rate Strategy for Development," Journal of Globalization and Development, De Gruyter, vol. 3(2), pages 1-31, March.
    3. Thibault Laurentjoye, 2022. "Foreign exchange reserves, imperfect substitutability of financial assets and the monetary policy quadrilemma," Working Papers PKWP2222, Post Keynesian Economics Society (PKES).
    4. Luis Alberto Alonso Gonzalez & Bruno Sovilla, 2014. "A Kaleckian model for understanding and responding to the economic policy challenges of remittances," International Review of Applied Economics, Taylor & Francis Journals, vol. 28(6), pages 832-848, September.
    5. Lúcio Otávio Seixas Barbosa & Frederico G. Jayme Jr & Fabrício J. Missio, 2017. "Managing real exchange rate for economic development :empirical evidences from developing countries," Textos para Discussão Cedeplar-UFMG 563, Cedeplar, Universidade Federal de Minas Gerais.
    6. Frenkel, Roberto & Rapetti, Martín, 2012. "Exchange rate regimes in the major Latin American countries since the 1950s: lessons from history," Revista de Historia Económica / Journal of Iberian and Latin American Economic History, Cambridge University Press, vol. 30(1), pages 157-188, January.

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