IDEAS home Printed from
   My bibliography  Save this paper

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


  • Richard C. Marston


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.

Suggested Citation

  • Richard C. Marston, 1979. "Cross Country Effects of Sterilization, Reserve Currencies and Foreign Exchange Information," NBER Working Papers 0391, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0391
    Note: ITI IFM

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-1055, December.
    2. Dornbusch, Rudiger, 1976. " The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 255-275.
    3. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    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. De Grauwe, Paul, 1975. "International Capital Flows and Portfolio Equilibrium: Comment," Journal of Political Economy, University of Chicago Press, vol. 83(5), pages 1077-1080, October.
    6. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
    7. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    8. 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.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Obstfeld, Maurice, 1983. "Exchange rates, inflation, and the sterilization problem: Germany, 1975-1981," European Economic Review, Elsevier, vol. 21(1-2), pages 161-189.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0391. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.