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

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  • Richard C. Marston

Abstract

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
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    References listed on IDEAS

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    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.
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    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.

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