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On the denomination of government debt : A critique of the portfolio balance approach

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  • Backus, David K.
  • Kehoe, Patrick J.

Abstract

We show that some classes of sterilized interventions have no effect on equilibrium prices and quantities. The proof does not require complete markets, Ricardian equivalence, monetary neutrality, or the law of one price. Moreover, regressions of exchange rates or interest differentials on variables measuring debt’s currency composition contain no information about the effectiveness of such interventions. Other interventions require changes in monetary and fiscal policy; their effects depend, generally, on the influence of these changes on the economy and not on the intervention alone. In short, sterilized intervention is not, as the portfolio balance approach indicates, an extra policy instrument.
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  • Backus, David K. & Kehoe, Patrick J., 1989. "On the denomination of government debt : A critique of the portfolio balance approach," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 359-376, May.
  • Handle: RePEc:eee:moneco:v:23:y:1989:i:3:p:359-376
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    Cited by:

    1. Olivier Jeanne, 2013. "Capital Account Policies and the Real Exchange Rate," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 9(1), pages 7-42.
    2. Humpage, Owen F. & Osterberg, William P., 1992. "Intervention and the foreign exchange risk premium: An empirical investigation of daily effects," Global Finance Journal, Elsevier, vol. 3(1), pages 23-50.
    3. Gourinchas, Pierre-Olivier & Rey, Hélène, 2013. "External Adjustment, Global Imbalances and Valuation Effects," CEPR Discussion Papers 9566, C.E.P.R. Discussion Papers.
    4. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
    5. Karen K. Lewis, 1994. "Puzzles in International Financial Markets," NBER Working Papers 4951, National Bureau of Economic Research, Inc.
    6. Kumhof, Michael, 2004. "Sterilization of short-term capital inflows--through lower interest rates?," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 1209-1221.
    7. Kathryn Dominguez & Jeffrey A. Frankel, 1991. "Does foreign exchange intervention matter? disentangling the portfolio and expectations effects for the mark," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
    8. Kuersteiner, Guido M. & Phillips, David C. & Villamizar-Villegas, Mauricio, 2018. "Effective sterilized foreign exchange intervention? Evidence from a rule-based policy," Journal of International Economics, Elsevier, vol. 113(C), pages 118-138.
    9. Stijn van Nieuwerburgh & Michael Kumhof, 2005. "Monetary Policy in an Equilibrium Portfolio Balance Model," 2005 Meeting Papers 851, Society for Economic Dynamics.
    10. Gourinchas, Pierre-Olivier & Rey, Hélène, 2014. "External Adjustment, Global Imbalances, Valuation Effects," Handbook of International Economics, Elsevier.
    11. Goldfajn, Ilan & Silveira, Marcos Antonio, 2002. "Should government smooth exchange rate risk?," Journal of Development Economics, Elsevier, vol. 69(2), pages 393-421, December.
    12. Alexandre Cunha, 2013. "On the relevance of floating exchange rate policies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 53(2), pages 357-382, June.
    13. repec:pal:imfecr:v:66:y:2018:i:2:d:10.1057_s41308-018-0055-7 is not listed on IDEAS
    14. Juan José Echavarría & Diego Vásquez & Mauricio Villamizar, 2008. "Expectativas, tasa de interés y tasa de cambio: paridad cubierta y no cubierta en Colombia, 2000-2007," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 26(56), pages 150-203, June.
    15. Mauricio Villamizar-Villegas & David Perez-Reyna, 2015. "A Survey on the Effects of Sterilized Foreign Exchange Intervention," BORRADORES DE ECONOMIA 012424, BANCO DE LA REPÚBLICA.
    16. Boyer, Russell S., 2004. "Rethinking the role of NCBs in the EMU," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 977-996.
    17. Michael Kumhof, 2009. "International Currency Portfolios," IMF Working Papers 09/48, International Monetary Fund.
    18. repec:eee:eecrev:v:101:y:2018:i:c:p:376-396 is not listed on IDEAS
    19. Roberto Chang, 2008. "Inflation Targeting, Reserves Accumulation, and Exchange Rate Management in Latin America," BORRADORES DE ECONOMIA 004518, BANCO DE LA REPÚBLICA.
    20. Owen F. Humpage & William P. Osterberg, 1992. "New results on the impact of central-bank intervention on deviations from uncovered interest parity," Working Paper 9207, Federal Reserve Bank of Cleveland.
    21. Roberto Chang, 2018. "Foreign Exchange Intervention Redux," NBER Working Papers 24463, National Bureau of Economic Research, Inc.
    22. Maurice Obstfeld, 1995. "Intenational Currency Experience: New Lessons and Lessons Relearned," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 119-220.
    23. Maurice Obstfeld, 1990. "The Effectiveness of Foreign-Exchange Intervention: Recent Experience, 1985- 1988," NBER Chapters,in: International Policy Coordination and Exchange Rate Fluctuations, pages 197-246 National Bureau of Economic Research, Inc.

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