Exchange rates, inflation, and the sterilization problem: Germany, 1975-1981
When the goals of internal and external macroeconomic equilibrium are in conflict, sterilized intervention in the foreign exchange market may provide an independent policy instrument through which the central bank can resolve its dilemma in the short run. This paper is concerned with the West German Bundesbank's use of sterilization during the recent years of exchange- rate flexibility. The paper asks whether the Bundesbank pursued sterilization during the years 1995-1981, and whether sterilized foreign exchange intervention exerts a significant influence on the exchange rate in the German case. Estimation of a stylized Bundesbank reaction function suggests an affirmative answer to the first of these questions. To assess the efficacy of sterilized intervention, a structural portfolio balance model of German asset markets and prices is estimated. Dynamic perfect-foresight simulations of the empirical model are used to ascertain whether imperfect substitutability between foreign and domestic bonds is sufficient to allow the Bundesbank to attain independent internal and external goals over the short run of about a month. The model's verdict is that the Bundesbank has little if any power to influence the exchange rate over that time span without altering current or expected future money-market conditions.
(This abstract was borrowed from another version of this item.)
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- Cumby, Robert E. & Huizinga, John & Obstfeld, Maurice, 1983.
"Two-step two-stage least squares estimation in models with rational expectations,"
Journal of Econometrics,
Elsevier, vol. 21(3), pages 333-355, April.
- Maurice Obstfeld & Robert E. Cumby & John Huizinga, 1983. "Two-Step Two-Stage Least Squares Estimation in Models with Rational Expectations," NBER Technical Working Papers 0011, National Bureau of Economic Research, Inc.
- Obstfeld, Maurice, 1980. "Imperfect asset substitutability and monetary policy under fixed exchange rates," Journal of International Economics, Elsevier, vol. 10(2), pages 177-200, May.
- Maurice Obstfeld, 1980. "Imperfect Asset Substitutability and Monetary Policy under Fixed Exchange Rates," NBER Working Papers 0485, National Bureau of Economic Research, Inc.
- Robert E. Cumby & Maurice Obstfeld, 1980. "Exchange-Rate Expectations and Nominal Interest Differentials: A Test ofthe Fisher Hypothesis," NBER Working Papers 0537, National Bureau of Economic Research, Inc.
- Henderson, Dale W, 1979. "Financial Policies in Open Economies," American Economic Review, American Economic Association, vol. 69(2), pages 232-239, May.
- Dale W. Henderson, 1979. "Financial policies in open economies," International Finance Discussion Papers 133, Board of Governors of the Federal Reserve System (U.S.).
- Aliber, Robert Z, 1973. "The Interest Rate Parity Theorem: A Reinterpretation," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1451-1459, Nov.-Dec..
- Dooley, Michael P & Isard, Peter, 1980. "Capital Controls, Political Risk, and Deviations from Interest-Rate Parity," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 370-384, April.
- Branson, William H. & Halttunen, Hannu & Masson, Paul, 1979. "Exchange rates in the short run : Some further results," European Economic Review, Elsevier, vol. 12(4), pages 395-402, October.
- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
- Michael R. Darby & Alan C. Stockman, 1983. "The Mark III International Transmission Model: Estimates," NBER Chapters, in: The International Transmission of Inflation, pages 113-161 National Bureau of Economic Research, Inc.
- Dooley, Michael & Isard, Peter, 1982. "A portfolio-balance rational-expectations model of the dollar-mark exchange rate," Journal of International Economics, Elsevier, vol. 12(3-4), pages 257-276, May.
- Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
- Frankel, Jeffrey A., 1983. "Estimation of portfolio-balance functions that are mean-variance optimizing : The mark and the dollar," European Economic Review, Elsevier, vol. 23(3), pages 315-327, September.
- Jeffrey A. Frankel, 1981. "Estimation of portfolio-balance functions that are mean-variance optimizing: the mark and the dollar," International Finance Discussion Papers 188, Board of Governors of the Federal Reserve System (U.S.).
- Hodrick, Robert J., 1981. "International asset pricing with time-varying risk premia," Journal of International Economics, Elsevier, vol. 11(4), pages 573-587, November.
- Obstfeld, Maurice, 1982. "The capitalization of income streams and the effects of open-market policy under fixed exchange rates," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 87-98.
- Maurice Obstfeld, 1980. "The Capitalization of Income Streams and the Effects of Open Market Policy under Fixed Exchange Rates," NBER Working Papers 0528, National Bureau of Economic Research, Inc.
- John R. Martin & Paul R. Masson, 1979. "Exchange Rates and Portfolio Balance," NBER Working Papers 0377, National Bureau of Economic Research, Inc.
- Richard C. Marston, 1979. "Cross Country Effects of Sterilization, Reserve Currencies and Foreign Exchange Information," NBER Working Papers 0391, National Bureau of Economic Research, Inc.
- Jacques R. Artus, 1981. "Monetary Stabilization with and without Government Credibility (Stabilisation monÃ©taire avec ou sans crÃ©dibilitÃ© gouvernementale) (EstabilizaciÃ³n monetaria y credibilidad del gobierno)," IMF Staff Papers, Palgrave Macmillan, vol. 28(3), pages 495-533, September.
- Stulz, ReneM., 1982. "The forward exchange rate and macroeconomics," Journal of International Economics, Elsevier, vol. 12(3-4), pages 285-299, May.
- 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.
- Michael R. Darby & Alan C. Stockman, 1980. "The Mark III International Transmission Model," NBER Working Papers 0462, National Bureau of Economic Research, Inc.
- Branson, William H. & Halttunen, Hannu & Masson, Paul, 1977. "Exchange rates in the short run: The dollar-dentschemark rate," European Economic Review, Elsevier, vol. 10(3), pages 303-324.
- Frankel, Jeffrey A., 1979. "The diversifiability of exchange risk," Journal of International Economics, Elsevier, vol. 9(3), pages 379-393, August. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:21:y:1983:i:1-2:p:161-189. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.