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Can We Sterilize? Theory and Evidence

  • Maurice Obstfeld

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.

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File URL: http://www.nber.org/papers/w0833.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0833.

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Date of creation: Jul 1982
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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.
Handle: RePEc:nbr:nberwo:0833
Note: ITI IFM
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  1. 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.
  2. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Hakkio, Craig S., 1981. "The term structure of the forward premium," Journal of Monetary Economics, Elsevier, vol. 8(1), pages 41-58.
  4. 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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