To what degree do central banks sterilize the effects of capital flows on domestic money supply?
Under the current system of managed float exchange rates, large countries are able to absorb changes in their balance-of-payments by either manipulating international reserves to sterilize capital flows or by accepting changes in their exchange rates. In this system, the monetary authorities of the G7 countries have found it beneficial to sterilize capital flows thereby stabilizing their exchange rates and gaining greater control of their domestic money supply. Previous empirical work on the effects of sterilization were conducted using shortrun models on fixed exchange rates. Using the monetary approach to the balance-of-payments which emphasizes the money market from which balance-of-payments imbalances are derived, this article combines the current managed float system of exchange rates with cointegration techniques in considering the long-run relationship that has developed between the monetary base and money demand of the G7 countries from sterilized capital flows.
Volume (Year): 7 (2000)
Issue (Month): 1 ()
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