Can We Sterilize? Theory and Evidence
This paper is a highly selective review of our knowledge about the scope for sterilized intervention in foreign exchange markets under alternative exchange-rate regimes. Section I demonstrates the potential importance of simultaneous-equations bias in single-equation econometric studies of the capital-account offset to monetary policy under fixed exchange rates. The empirical record suggests that, in the case of West Germany, sterilization was a feasible short-run monetary strategy in the 1960s. Section II notes that there is considerable recent evidence of imperfect asset substitutability under the managed float. While limited substitution between bonds of different currency denomination is a precondition for the efficacy of sterilized foreign-exchange intervention, it is no guarantee of efficacy. Whether limited substitutability can in fact be exploited in a predictable manner by central banks is a distinct, and unanswered, question.
|Date of creation:||Jul 1982|
|Date of revision:|
|Publication status:||published as Obstfeld, Maurice. "Can We Sterilize? Theory and Evidence." The American Economic Review, Vol. 72, No. 2 (May 1982), pp. 45-50.|
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- Robert E. Cumby & Maurice Obstfeld, 1983.
"Capital Mobility and the Scope for Sterilization: Mexico in the 1970s,"
in: Financial Policies and the World Capital Market: The Problem of Latin American Countries, pages 245-276
National Bureau of Economic Research, Inc.
- Robert E. Cumby & Maurice Obstfeld, 1981. "Capital mobility and the scope for sterilization: Mexico in the 1970s," International Finance Discussion Papers 187, Board of Governors of the Federal Reserve System (U.S.).
- Robert E. Cumby & Maurice Obstfeld, 1981. "Capital Mobility and the Scope for Sterilization: Mexico in the 1970s," NBER Working Papers 0770, National Bureau of Economic Research, Inc.
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185, Massachusetts Institute of Technology (MIT), Department of Economics.
- Hakkio, Craig S., 1981.
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- Craig S. Hakkio, 1980. "The Term Structure of the Forward Premium," NBER Working Papers 0426, National Bureau of Economic Research, Inc.
- Craig S. Hakkio, 1979. "The Term Structure of the Forward Premium," Discussion Papers 404, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
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