Cross Country Effects of Sterilization, Reserve Currencies and Foreign Exchange Information
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.
|Date of creation:||Aug 1979|
|Date of revision:|
|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.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
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165, Massachusetts Institute of Technology (MIT), Department of Economics.
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57, Board of Governors of the Federal Reserve System (U.S.).
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- 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.).
- Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-55, December.
- 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.
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