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Managing Foreign Exchange Inflows: An Analysis of Sterilisation in Pakistan

  • Asad Jan

    (Economic Policy Department of the State Bank of Pakistan.)

  • Ather Elahi

    (Economic Policy Department of the State Bank of Pakistan.)

  • M. A. Zahid

    (Economic Policy Department of the State Bank of Pakistan.)

The paper evaluates Pakistan’s experience of managing capital inflows witnessed in recent years, particularly after the 9/11 events, which had implications for the conduct of monetary policy. The State Bank of Pakistan intervened in the foreign exchange market by purchasing excess supply, with the objective to contain volatility in exchange rate, and at the same time building up foreign exchange reserves. The market interventions led to surplus rupee liquidity, which had to be sterilised in order to ensure price stability. The paper estimated empirically the sterilisation coefficient by using OLS technique. Sterilisation coefficient for Pakistan during July2000-December2003 was –0.87, indicating that 87 percent of the increase in NFA was sterilised through selling of government securities.

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File URL: http://www.pide.org.pk/pdf/PDR/2005/Volume4/777-792.pdf
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Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 44 (2005)
Issue (Month): 4 ()
Pages: 777-792

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Handle: RePEc:pid:journl:v:44:y:2005:i:1:p:777-792
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  1. Kouri, Pentti J K & Porter, Michael G, 1974. "International Capital Flows and Portfolio Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 443-67, May/June.
  2. Robert E. Cumby & Maurice Obstfeld, 1981. "Capital Mobility and the Scope for Sterilization: Mexico in the 1970s," NBER Working Papers 0770, National Bureau of Economic Research, Inc.
  3. Pedro Aspe Armella & Rudiger Dornbusch & Maurice Obstfeld, 1983. "Financial Policies and the World Capital Market: The Problem of Latin American Countries," NBER Books, National Bureau of Economic Research, Inc, number arme83-1, October.
  4. Miller, Norman C & Askin, Sherry S, 1976. "Monetary Policy and the Balance of Payments in Brazil and Chile," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(2), pages 227-38, May.
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