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Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?

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  • Mr. Jeffrey A. Frankel

Abstract

Some countries undergoing exchange-rate-based stabilization and financial liberalization in Latin America, Asia and elsewhere have faced large capital inflows since 1991. Many have tried to sterilize the reserve inflows. Calvo, Leiderman, and Reinhart argue essentially that sterilization is more difficult than generally realized, due to the interest costs on sterilization bonds. Reisen argues essentially that sterilization is easier than generally believed. This paper reviews the issues in the simplest textbook model and concludes that local interest rates are not likely to rise if the source of the disturbance is an exogenous capital inflow, but will rise if the disturbance is an increase in money demand or an increase in exports.

Suggested Citation

  • Mr. Jeffrey A. Frankel, 1994. "Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?," IMF Working Papers 1994/159, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:1994/159
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    References listed on IDEAS

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    6. Gikas Hardouvelis & Rafael La Porta & Thierry A. Wizman, 1994. "What Moves the Discount on Country Equity Funds?," NBER Chapters, in: The Internationalization of Equity Markets, pages 345-403, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    WP; interest rate; central bank; capital; capital mobility; money stock; price level; exchange rate peg; interest rate differential; central bank sell; mobility case; heightened interest rate; world interest rates; money inflow; government securities market; money supply increase; Exchange rates; Monetary base; Sterilization; Demand for money; Bonds; East Asia; Southeast Asia;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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