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A general equilibrium model of exchange market intervention with variable sterilization

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  • Natividad, Fidelina
  • Stone, Joe A.

Abstract

This paper presents a general equilibrium model that incorporates three of the most prominent features of the recent floating exchange rate period: (1) rational asset markets; (2)"managed" exchange rates with partial (and variable) sterilization; and (3) the use by policymakers of both purely discretionary and systematic policies. The model is characterized by rational expectations, sticky prices, imperfect capital substitution, separate policy functions for domestic credit and reserves, and variable sterilization. The most important implications of the model are that (1) monetary, exchange rate, and variable sterilization policies may be used to pursue tradeoffs between internal and external objectives; and (2) these tradeoffs are nonlinear functions of the policies chosen (e.g., partial sterilization is not a simple linear interpolation of complete and zero sterilization).
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Suggested Citation

  • Natividad, Fidelina & Stone, Joe A., 1990. "A general equilibrium model of exchange market intervention with variable sterilization," Journal of International Economics, Elsevier, vol. 29(1-2), pages 133-145, August.
  • Handle: RePEc:eee:inecon:v:29:y:1990:i:1-2:p:133-145
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    References listed on IDEAS

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    1. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
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    9. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-985, December.
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    13. Leslie Young & James E. Anderson, 1980. "The Optimal Policies for Restricting Trade under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 47(5), pages 927-932.
    14. Thursby, Marie & Jensen, Richard, 1983. "A conjectural variation approach to strategic tariff equilibria," Journal of International Economics, Elsevier, pages 145-161.
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    Cited by:

    1. Ono, Y., 2001. "International Spillover of Economic Fluctuations:A Dynamic Optimization Approach," ISER Discussion Paper 0527, Institute of Social and Economic Research, Osaka University.
    2. Kletzer, Kenneth & Spiegel, Mark M., 2004. "Sterilization costs and exchange rate targeting," Journal of International Money and Finance, Elsevier, pages 897-915.

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