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Sterilization, Capital Mobility and Interest Rate Determination for East Asia

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  • Tony Cavoli

    (Queensland University of Technology)

Abstract

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.

Suggested Citation

  • Tony Cavoli, 2007. "Sterilization, Capital Mobility and Interest Rate Determination for East Asia," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 22, pages 210-230.
    • Handle: RePEc:ris:integr:0392
    as

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    References listed on IDEAS

    as
    1. Montiel, Peter & Reinhart, Carmen M., 1999. "Do capital controls and macroeconomic policies influence the volume and composition of capital flows? Evidence from the 1990s," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 619-635, August.
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    Cited by:

    1. 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.
    2. Ying, Yung-Hsiang & Kuan, Chung-Ming & Tung, Chris Y. & Chang, Koyin, 2013. "“Capital mobility in East Asian Countries is not so high”: Examining the impact of sterilization on capital flows," China Economic Review, Elsevier, vol. 24(C), pages 55-64.
    3. Vandana Arya & Tony Cavoli & Ilke Onur, 2020. "Do managed exchange rates and monetary sterilization encourage capital inflows?," PLOS ONE, Public Library of Science, vol. 15(8), pages 1-11, August.

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    Keywords

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    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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