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Sterilization and Offsetting Capital Movements: Evidence from West Germany, 1960-1970

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  • Maurice Obstfeld

Abstract

The purpose of this paper is two fold. First, to estimate, using structural methods, the extent to which capital flows undermined West German monetary policy during the Bretton Woods years 1960 to 1970 and second, to show that earlier reduced form estimates of the capital-account offset coefficient are tainted by simultaneity bias thanks to the Deutsche Bundesbank's systematic policy of sterilization, and so overestimate the true coefficient. The paper distinguishes between the short-run or one-quarter offset coefficient and the long-run coefficient implied by the full adjustment of all asset markets. An aggregative structural model German financial markets yields short-run coefficients between .50 and .65implying substantial Bundesbank control over the monetary base, at least in the short-run. A formal test for simultaneous-equations bias provides evidence that variations in domestic credit cannot be regarded as exogenous and that equations regressing capital flows on changes in domestic credit and other variables exaggerate the extent of the offset.

Suggested Citation

  • Maurice Obstfeld, 1980. "Sterilization and Offsetting Capital Movements: Evidence from West Germany, 1960-1970," NBER Working Papers 0494, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0494
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    1. Neumann, Manfred J. M., 1978. "Offsetting capital flows : A reexamination of the German case," Journal of Monetary Economics, Elsevier, vol. 4(1), pages 131-142, January.
    2. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    3. Murray, Gordon L, 1978. "Monetary Policy and Capital Inflow," The Economic Record, The Economic Society of Australia, vol. 54(146), pages 271-280, August.
    4. Manfred Willms, 1971. "Controlling money in an open economy: the German case," Review, Federal Reserve Bank of St. Louis, vol. 53(Apr), pages 10-27.
    5. Kouri, Pentti J K & Porter, Michael G, 1974. "International Capital Flows and Portfolio Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 443-467, May/June.
    6. Godfrey, Leslie G, 1978. "A Note on the Use of Durbin's h Test When the Equation is Estimated by Instrumental Variables," Econometrica, Econometric Society, vol. 46(1), pages 225-228, January.
    7. John Hewson & Eisuke Sakakibara, 1977. "The effectiveness of German controls on capital inflow," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 113(4), pages 645-666, December.
    8. Modigliani, Franco & Rasche, Robert & Cooper, J Philip, 1970. "Central Bank Policy, the Money Supply, and the Short-Term Rate of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(2), pages 166-218, May.
    9. Michael G. Porter, 1972. "Capital Flows as an Offset to Monetary Policy: The German Experience (Les flux de capitaux peuvent-ils mettre en échec la politique monétaire? L'expérience allemande) (Los flujos de capital como ne," IMF Staff Papers, Palgrave Macmillan, vol. 19(2), pages 395-424, July.
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    Cited by:

    1. Monnet, Eric & Puy, Damien, 2020. "Do old habits die hard? Central banks and the Bretton Woods gold puzzle," Journal of International Economics, Elsevier, vol. 127(C).
    2. Michael R. Darby & James R. Lothian, 1983. "V. Conclusions: Conclusions on the International Transmission of Inflation," NBER Chapters, in: The International Transmission of Inflation, pages 491-524, National Bureau of Economic Research, Inc.
    3. Michael R. Darby, 1983. "Monetary Policy in the Large Open Economy," NBER Working Papers 1127, National Bureau of Economic Research, Inc.
    4. Hans Genberg & Alexander Swoboda, 1993. "The Provision of Liquidity in the Bretton Woods System," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 269-316, National Bureau of Economic Research, Inc.

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