Offset and Sterilization Under Fixed Exchange Rates With An Optimizing Central Bank
The traditional approach to the estimation of the offset and sterilization equations can be criticized for the ad-hoc specification of the reaction function of the monetary authorities and the endogeneity of the domestic credit and foreign reserve variables in the estimated equations. The paper proposes an alternative analytical model where the sterilization and offset equations are derived from an explicit maximization problem solved by the monetary authority. In such a model, the optimal intervention and sterilization policies of the monetary authority are shown to be dependent on the different disturbances hitting the economy and the preferences of the monetary authority. In particular, under a wide range of domestic and foreign disturbances the optimal response of the central bank will lead to negatively correlated comovements of domestic credit and foreign reserves if the cer1tral bank cares more about the interest rate smoothing objective relative to the foreign exchange reserve stabilization goal. Conversely, positive correlations between domestic credit and foreign reserves will be observed if the foreign reserve objective is dominant.
|Date of creation:||Nov 1988|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kouri, Pentti J. K., 1975. "The hypothesis of offsetting capital flows : A case study of Germany," Journal of Monetary Economics, Elsevier, vol. 1(1), pages 21-39, January.
- Maurice Obstfeld, 1982.
"Can We Sterilize? Theory and Evidence,"
NBER Working Papers
0833, National Bureau of Economic Research, Inc.
- 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.
- Aoki, Masanao, 1977. "A note on the stability of the interaction of monetary policies," Journal of International Economics, Elsevier, vol. 7(1), pages 81-94, February.
- Neumann, Manfred J. M., 1984. "Intervention in the mark/dollar market: the authorities' reaction function," Journal of International Money and Finance, Elsevier, vol. 3(2), pages 223-239, August.
- Vaubel, Roland, 1980. "The return to the new european monetary system : Objectives, incentives, perspectives," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 13(1), pages 173-221, January.
- Robert J. Barro, 1988. "Interest-Rate Smoothing," NBER Working Papers 2581, National Bureau of Economic Research, Inc.
- Neumann, Manfred J. M., 1978. "Offsetting capital flows : A reexamination of the German case," Journal of Monetary Economics, Elsevier, vol. 4(1), pages 131-142, January.
- Herring, Richard J. & Marston, Richard C., 1977. "Sterilization policy: The trade-off between monetary autonomy and control over foreign exchange reserves," European Economic Review, Elsevier, vol. 10(3), pages 325-343.
- Marston, Richard C., 1980. "Cross country effects of sterilization, reserve currencies, and foreign exchange intervention," Journal of International Economics, Elsevier, vol. 10(1), pages 63-78, February.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2777. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.