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Capital Mobility and the Scope for Sterilization: Mexico in the 1970s

  • Robert E. Cumby
  • Maurice Obstfeld

This paper is an empirical study of the Banco de Mexico's monetary policy during the 1970s. In particular, it studies the Mexican monetary equilibria and the extent to which capital mobility undermined monetary control. Estimates of a Banco de Mexico reaction function suggest that the Mexican central bank attempted to sterilize reserve flows through offsetting movements in domestic credit, at least over the second half of the decade. This finding suggests that estimates of the capital-account response to domestic credit expansion should be derived from a structural model, and we accordingly estimate an aggregative three-equation model of Mexican financial markets. The paper distinguishes between the short-run or one-quarter capital-account offset and a hypothetical long-run offset that would obtain under instantaneous asset-market adjustment. The model implies that, depending on the method of monetary expansion, between 30 and 50 percent of an expansion in domestic credit was offset by capital outflow in the same quarter. The implied long-run offsets range from 50 to 76 percent. These offset coefficients indicate that the Banco de Mexico's monetary control was exercised at a substantial cost in terms of reserve volatility.

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File URL: http://www.nber.org/papers/w0770.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0770.

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Date of creation: Sep 1981
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Publication status: published as Cumby, Robert E. and Maurice Obstfeld. "Capital Mobility and the Scope for Sterilization." Financial Policies and the World Capital Market: The Problem of Latin American Countries, ed. Pedro Aspe Armella, Rudiger Dornbusch, Maurice Obstfeld. Chicago: UCP, (1983) pp. 245-269.
Handle: RePEc:nbr:nberwo:0770
Note: ITI IFM
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  1. Murray, Gordon L, 1978. "Monetary Policy and Capital Inflow," The Economic Record, The Economic Society of Australia, vol. 54(146), pages 271-80, August.
  2. Maurice Obstfeld & Robert E. Cumby & John Huizinga, 1983. "Two-Step Two-Stage Least Squares Estimation in Models with Rational Expectations," NBER Technical Working Papers 0011, National Bureau of Economic Research, Inc.
  3. Frenkel, Jacob A & Glyfason, Thorvaldur & Helliwell, John F, 1980. "A Synthesis of Monetary and Keynesian Approaches to Short-Run Balance-of-Payments Theory," Economic Journal, Royal Economic Society, vol. 90(359), pages 582-92, September.
  4. Eliana A. Cardoso & Rudiger Dornbusch, 1980. "Three Papers on Brazilian Trade and Payments," NBER Working Papers 0541, National Bureau of Economic Research, Inc.
  5. Miller, Norman C & Askin, Sherry S, 1976. "Monetary Policy and the Balance of Payments in Brazil and Chile," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(2), pages 227-38, May.
  6. 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 443-67, May/June.
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