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Sterilization, Capital Mobility and Interest Rate Determination for East Asia

  • Cavoli, Tony

    ()

    (Queensland University of Technology)

Registered author(s):

    This paper uses a simple open economy interest rate determination model to empirically examine an important aspect of pre-crisis monetary and exchange rate policy. It investigates whether sterilization of the reserve effects of capital inflows helped keep interest rates sufficiently high that they may have prolonged the inflow of capital. Despite the use of a pre-crisis sample in this study, the issues in this paper have relevance today given the recent trend in foreign capital inflow for Asia. The empirical section is concerned with the effect of reserve flows on the interest rate and is divided into two parts. The first tests for a contemporaneous effect of the basic model using OLS and IV methods. The second generalizes the model to assess for lagged effects by way of VAR analysis. The results show that there are some contemporaneous effects of sterilization on the domestic interest rate though the effects are stronger when estimating the lagged model.

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    Article provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.

    Volume (Year): 22 (2007)
    Issue (Month): ()
    Pages: 210-230

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    Handle: RePEc:ris:integr:0392
    Contact details of provider: Web page: http://econo.sejong.ac.kr/
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    1. Reinhart, Carmen & Montiel, Peter, 1999. "Do capital controls influence the volume and composition of capital flows? Evidence from the 1990s," MPRA Paper 13710, University Library of Munich, Germany.
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