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Sterilized Interventions May Not Be So Sterilized

Author

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  • Shalva Mkhatrishvili

    (National Bank of Georgia)

  • Giorgi Tsutskiridze

    (National Bank of Georgia)

  • Lasha Arevadze

    (National Bank of Georgia)

Abstract

It is widely believed that sterilized FX interventions do not affect domestic currency interest rates. The reason is the word “sterilized.” Yet we show in this paper that when a collateral base for central bank operations isn’t big enough, sterilized interventions may still affect interest rates, loan extension, and, hence, real economy (beyond the effects of altered exchange rate). The mechanism is simple and works through the liquidity risk premium.We demonstrate the importance of this channel through theoretical as well as empirical perspectives. Our modeling framework also provides interesting insights about a relationship between a liquidity risk and reserve requirements, among other results.

Suggested Citation

  • Shalva Mkhatrishvili & Giorgi Tsutskiridze & Lasha Arevadze, 2024. "Sterilized Interventions May Not Be So Sterilized," International Journal of Central Banking, International Journal of Central Banking, vol. 20(4), pages 371-413, October.
    • Handle: RePEc:ijc:ijcjou:y:2024:q:4:a:7
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    References listed on IDEAS

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    1. Jaromir Benes & Andrew Berg & Rafael Portillo & David Vavra, 2015. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," Open Economies Review, Springer, vol. 26(1), pages 81-108, February.
    2. Saunders, Anthony & Schumacher, Liliana, 2000. "The determinants of bank interest rate margins: an international study," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 813-832, December.
    3. Blaise Gadanecz & Aaron Mehrotra & Madhusudan S Mohanty, 2014. "Foreign exchange intervention and the banking system balance sheet in emerging market economies," BIS Working Papers 445, Bank for International Settlements.
    4. Shalva Mkhatrishvili & Douglas Laxton & Davit Tutberidze & Tamta Sopromadze & Saba Metreveli & Lasha Arevadze & Tamar Mdivnishvili & Giorgi Tsutskiridze, 2019. "Solving non-linear dynamic models (more) efficiently: application to a simple monetary policy model," NBG Working Papers 01/2019, National Bank of Georgia.
    5. Shalva Mkhatrishvili & Douglas Laxton & Davit Tutberidze & Tamta Sopromadze & Saba Metreveli & Lasha Arevadze & Tamar Mdivnishvili & Giorgi Tsutskiridze, 2019. "Solving non-linear dynamic models (more) efficiently: application to a simple monetary policy model," NBG Working Papers 012019, National Bank of Georgia.
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