Do sterilized foreign exchange interventions create money?

The growth of official foreign reserves in emerging Asian countries over recent decades has been extensive but its effects on the money market appear to be well sterilized in that decreases in interest rates or acceleration of credit growth have not been registered. We analyze the effect of foreign exchange intervention on components of the banking system’s balance sheet for 19 emerging economies that pursued an independent interest rate policy and did not maintain an exchange rate peg. The sample includes six Asian countries (India, Indonesia, Korea, Malaysia, the Philippines, and Thailand). We apply a vector autoregressive technique to quarterly data for the period 2001Q4 to 2016Q1. For the sample as a whole, we find that money stock tends to expand in response to an increase in the foreign reserves of the central bank. For the Asian countries in particular, we conclude that external transactions have contributed to money growth acceleration despite sterilization that succeeded in stabilizing interest rates.