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Do sterilized foreign exchange interventions create money?

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  • Alexey Ponomarenko

    () (Bank of Russia, Russian Federation)

Abstract

When a central bank accumulates foreign reserves, there are two possible ways of balance of payments adjustment: (1) decreasing commercial banks’ net foreign assets and (2) decreasing the non-banking sector’s net foreign assets and/or increasing the current account surplus. In the latter case, money is created. It does not matter whether the central bank sterilizes the bank reserves that it supplied to the money market and prevents the interest rate change – money will be created anyway (although sterilization may prevent further money creation through credit extension). Our empirical analysis shows that for emerging markets the type (2) adjustment is more common than type (1). Therefore, the accumulation of foreign reserves is likely to create money even when sterilized (i.e. it does not lead to lower money market interest rates).

Suggested Citation

  • Alexey Ponomarenko, 2019. "Do sterilized foreign exchange interventions create money?," Bank of Russia Working Paper Series wps40, Bank of Russia.
  • Handle: RePEc:bkr:wpaper:wps40
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    References listed on IDEAS

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    Cited by:

    1. Ramis Khabibullin & Alexey Ponomarenko & Sergei Seleznev, 2018. "Forecasting the implications of foreign exchange reserve accumulation with an agent-based model," Bank of Russia Working Paper Series wps37, Bank of Russia.
    2. Alexey Ponomarenko, 2019. "Foreign exchange reserves and money supply," Bank of Russia Working Paper Series note19, Bank of Russia.

    More about this item

    Keywords

    Money supply; credit; foreign exchange interventions; foreign exchange reserves; emerging markets.;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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