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Capital inflows and the interest premium problem: The effects of monetary sterilisation in selected Asian economies

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  • Cavoli, Tony
  • Rajan, Ramkishen S.

Abstract

Sterilisation of capital inflows remains a pertinent policy option for many Southeast Asian economies. This paper examines some of the possible consequences of complete and incomplete sterilisation by examining its effect on domestic interest rates. We find that there is evidence to suggest that sterilisation influences local rates directly, but the relationship may not be sufficient to preserve interest differentials or to substantially soften the effects of global liquidity transfers into domestic financial market conditions.

Suggested Citation

  • Cavoli, Tony & Rajan, Ramkishen S., 2015. "Capital inflows and the interest premium problem: The effects of monetary sterilisation in selected Asian economies," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 1-18.
  • Handle: RePEc:eee:reveco:v:39:y:2015:i:c:p:1-18
    DOI: 10.1016/j.iref.2015.05.002
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    References listed on IDEAS

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    Keywords

    Monetary Sterilisation; Interest rates; Asia;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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