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Cross Country Effects of Sterilization, Reserve Currencies and Foreign Exchange Information

  • Richard C. Marston
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    This study examines the international repercussions of national sterilization policies under fixed exchange rates and managed flexibility. The effects of sterilization on the country pursuing the policy are well-known, but the adverse effects on other countries have not been adequately explored. In this study, a stochastic framework is used to analyze the impact of balance of payments disturbances on key financial variables in the domestic and foreign countries. The effects of sterilization are explored under fixed rates, and the combined effects of foreign exchange intervention and sterilization are similarly investigated in a regime of managed flexibility. In either regime, sterilization by the foreign country imposes costs on the domestic country by magnifying the impact of balance of payments disturbances on the domestic financial market. The analysis has important implications for the use of reserve currencies: Countries issuing reserve currencies benefit from the automatic sterilization of their balance of payments surpluses or deficits, while countries using reserve currencies encounter the same cross country effects as with discretionary sterilization.

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    File URL: http://www.nber.org/papers/w0391.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0391.

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    Date of creation: Aug 1979
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    Publication status: published as Marston, Richard C. "Cross Country Effects of Sterlilization, Reserve Currencies, and Foreign Exchange Intervention." Journal of International Economics, Vol. 10, No. 1, (February 1980), pp. 63-78.
    Handle: RePEc:nbr:nberwo:0391
    Note: ITI IFM
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    1. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
    2. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-55, December.
    3. Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 197-216, May.
    4. Lance Girton & Dale W. Henderson, 1976. "Central bank operations in foreign and domestic assets under fixed and flexible exchange rates," International Finance Discussion Papers 83, Board of Governors of the Federal Reserve System (U.S.).
    5. Dornbusch, Rudiger, 1976. " The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 255-75.
    6. Aoki, Masanao, 1977. "A note on the stability of the interaction of monetary policies," Journal of International Economics, Elsevier, vol. 7(1), pages 81-94, February.
    7. De Grauwe, Paul, 1975. "International Capital Flows and Portfolio Equilibrium: Comment," Journal of Political Economy, University of Chicago Press, vol. 83(5), pages 1077-80, October.
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