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Can We Sterilize? Theory and Evidence

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  • Maurice Obstfeld

Abstract

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.

Suggested Citation

  • Maurice Obstfeld, 1982. "Can We Sterilize? Theory and Evidence," NBER Working Papers 0833, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0833 Note: ITI IFM
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    1. Hakkio, Craig S., 1981. "The term structure of the forward premium," Journal of Monetary Economics, Elsevier, pages 41-58.
    2. 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 829-853, October.
    3. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Publishing House "SINERGIA PRESS", pages 112-134.
    4. 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.).
    5. 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.
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    Cited by:

    1. Ouyang, Alice Y. & Rajan, Ramkishen S. & Willett, Thomas D., 2010. "China as a reserve sink: The evidence from offset and sterilization coefficients," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 951-972, September.
    2. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, pages 839-868.
    3. M. Buch, Claudia & Hanschel, Elke, 2000. "The Effectiveness of Capital Controls: The Case of Slovenia," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 15, pages 602-628.
    4. J. Stephen Ferris & Hossein Kavand, 2008. "The monetary effects arising from stochastic resource revenues and the subsidization of financial intermediation in resource rich developing economies," Carleton Economic Papers 08-05, Carleton University, Department of Economics.
    5. Reinhart, Carmen M. & Reinhart, Vincent & Tashiro, Takeshi, 2016. "Does reserve accumulation crowd out investment?," Journal of International Money and Finance, Elsevier, pages 89-111.
    6. Reuven Glick & Michael Hutchison, 1989. "Exchange rates and monetary policy," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 17-29.
    7. Michael D. Bordo & Barry Eichengreen, 1998. "Implications of the Great Depression for the Development of the International Monetary System," NBER Chapters,in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 403-454 National Bureau of Economic Research, Inc.
    8. W. Lee Hoskins, 1985. "Foreign Experiences With Monetary Targeting: A Practitioner'S Perspective," Contemporary Economic Policy, Western Economic Association International, vol. 3(5), pages 71-83, September.
    9. Jaromir Benes & Andrew Berg & Rafael Portillo & David Vavra, 2015. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," Open Economies Review, Springer, pages 81-108.
    10. Frenkel, Jacob A. & Mussa, Michael L., 1985. "Asset markets, exchange rates and the balance of payments," Handbook of International Economics,in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 14, pages 679-747 Elsevier.
    11. William H. Branson, 1984. "Exchange Rate Policy after a Decade of "Floating"," NBER Chapters,in: Exchange Rate Theory and Practice, pages 79-118 National Bureau of Economic Research, Inc.
    12. Nouriel Roubini, 1988. "Offset and Sterilization Under Fixed Exchange Rates With An Optimizing Central Bank," NBER Working Papers 2777, National Bureau of Economic Research, Inc.
    13. Sebastian Edwards & Fernando J. Losada, 1994. "Fixed Exchange Rates, Inflation and Macroeconomic Discipline," NBER Working Papers 4661, National Bureau of Economic Research, Inc.
    14. Kee Kuan Foong, 2010. "Managing Capital Flows: The Case of Malaysia," Chapters,in: Managing Capital Flows, chapter 12 Edward Elgar Publishing.
    15. Drabek, Zdenek & Griffith-Jones, Stephany, 1998. "Managing capital flows in transition economies with a case-study of Central and Eastern Europe," WTO Staff Working Papers ERAD-98-04, World Trade Organization (WTO), Economic Research and Statistics Division.
    16. Roberto Steiner, 1996. "La reciente afluencia de capital extranjero a Colombia," COYUNTURA ECONÓMICA, FEDESARROLLO, June.

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