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:||Jan 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.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- 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.
- Robert E. Cumby & Maurice Obstfeld, 1983. "Capital Mobility and the Scope for Sterilization: Mexico in the 1970s," NBER Chapters, 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.).
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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.
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"Specification tests in econometrics,"
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- 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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