Accounting for Reserves
Views on the effectiveness of sterilized reserve intervention vary. Sterilized intervention is generally seen as ineffective in advanced countries while persistent intervention by some emerging markets is often cited as contributing to undervalued exchange rates and current account surpluses. This paper argues that capital controls reconcile these views. We find strong and highly robust evidence that sterilized intervention is fully offset by outflows of private money in countries without controls, while controls partially block this offset. For a country with extensive capital controls, every dollar in additional reserves increases the current account by some 50 cents. This is mainly offset by an opposite adjustment in the current account of the United Statesâ€”the dominant reserve currency issuer with the deepest and most liquid bond marketsâ€”with a smaller diversion to other emerging markets.
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- Christopher J. Neely, 2005.
"An analysis of recent studies of the effect of foreign exchange intervention,"
2005-030, Federal Reserve Bank of St. Louis.
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NBER Working Papers
7581, National Bureau of Economic Research, Inc.
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- Menzie David Chinn & Eswar Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration," IMF Working Papers 00/46, International Monetary Fund.
- Christopher J. Neely, 2011. "A foreign exchange intervention in an era of restraint," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 303-324.
- Neely, Christopher J., 2008.
"Central bank authorities' beliefs about foreign exchange intervention,"
Journal of International Money and Finance,
Elsevier, vol. 27(1), pages 1-25, February.
- Christopher J. Neely, 2007. "Central bank authorities’ beliefs about foreign exchange intervention," Working Papers 2006-045, Federal Reserve Bank of St. Louis.
- Menzie D. Chinn & Barry Eichengreen & Hiro Ito, 2011. "A Forensic Analysis of Global Imbalances," NBER Working Papers 17513, National Bureau of Economic Research, Inc.
- Christopher J. Neely, 2011. "The great foreign exchange intervention of 2011," Economic Synopses, Federal Reserve Bank of St. Louis.
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