IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/2328.html
   My bibliography  Save this paper

Central bank intervention, sterilization and monetary independence: the case of Pakistan

Author

Listed:
  • Waheed, Muhammad

Abstract

This paper analyzes the response of the State bank of Pakistan—the central bank, to foreign exchange inflows for the period of 2001:1 to 2006:8. In this context, we estimated sterilization and offset coefficients using vector autoregression (VAR) model to account for the issue of endogeneity of domestic credit with the foreign exchange interventions. In addition, the paper also analyzes the role of foreign and domestic interest rate differentials in pulling in or pushing out of these foreign exchange flows. We found that the offset coefficient is very small and insignificant (0.16) implying that changes in credit resulted in very minimal offsetting reserve flows. The study found out that for the sample period, SBP only partially sterilized the inflows with magnitude of coefficient at (0.50) confirming the stylized facts. Results also indicate that inflows were neither pulled into the country due to high domestic interest rates due to some domestic policy nor they are pushed into Pakistan owing to low interest rates abroad.

Suggested Citation

  • Waheed, Muhammad, 2007. "Central bank intervention, sterilization and monetary independence: the case of Pakistan," MPRA Paper 2328, University Library of Munich, Germany, revised Mar 2007.
    • Handle: RePEc:pra:mprapa:2328
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/2328/1/MPRA_paper_2328.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Franses, Philip Hans, 1991. "Seasonality, non-stationarity and the forecasting of monthly time series," International Journal of Forecasting, Elsevier, vol. 7(2), pages 199-208, August.
    2. Asad Jan & Ather Elahi & M. A. Zahid, 2005. "Managing Foreign Exchange Inflows: An Analysis of Sterilisation in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 44(4), pages 777-792.
    3. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    4. Olcay Yucel Emir & Almila Karasoy & Kursat Kunter, 2000. "Monetary Policy Reaction Function In Turkey," Discussion Papers 0005, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    5. Jeffrey A. Frankel, 1997. "Sterilization of money inflows: Difficult (Calvo) or Easy (Reisen)?," Estudios de Economia, University of Chile, Department of Economics, vol. 24(2 Year 19), pages 263-285, December.
    6. Hylleberg, S. & Engle, R. F. & Granger, C. W. J. & Yoo, B. S., 1990. "Seasonal integration and cointegration," Journal of Econometrics, Elsevier, vol. 44(1-2), pages 215-238.
    7. Reisen, Helmut, 1993. "Capital flows and their effect on the monetary base," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    8. Miller, Norman C & Askin, Sherry S, 1976. "Monetary Policy and the Balance of Payments in Brazil and Chile," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(2), pages 227-238, May.
    9. Reinhart, Carmen M. & Dunaway, Steven, "undated". "Dealing with Capital Inflows Are There Any Lessons?," WIDER Working Papers 295321, United Nations University, World Institute for Development Economic Research (UNU-WIDER).
    10. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    11. Blejer, Mario I & Leiderman, Leonardo, 1981. "A Monetary Approach to the Crawling-Peg System: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 89(1), pages 132-151, February.
    12. Guillermo A. Calvo, 1991. "The Perils of Sterilization," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 921-926, December.
    13. Leiderman, Leonardo, 1984. "On the monetary-macro dynamics of Colombia and Mexico," Journal of Development Economics, Elsevier, vol. 14(1), pages 183-201.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Igor Ljubaj & Ana Martinis & Marko Mrkalj, 2010. "Capital Inflows and Efficiency of Sterilisation – Estimation of Sterilisation and Offset Coefficients," Working Papers 24, The Croatian National Bank, Croatia.
    2. Abdul Rishad & Sanjeev Gupta & Akhil Sharma, 2022. "An Assessment of The Effectiveness of Sterilization of Central Bank Interventions: Empirical Evidence from India," Prague Economic Papers, Prague University of Economics and Business, vol. 2022(5), pages 417-440.
    3. Lim, Ewe Ghee & Goh, SooKhoon, 2011. "Is Malaysia exempted from impossible trinity: empirical evidence from 1991-2009," MPRA Paper 30804, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Waheed, Muhammad, 2010. "Foreign exchange intervention and sterilization: an investigation of State Bank of Pakistan’s Reaction Function," MPRA Paper 33161, University Library of Munich, Germany.
    2. Ricardo J. Caballero & Arvind Krishnamurthy, 2000. "International Liquidity Management: Sterilization Policy in Illiquid Financial Markets," Econometric Society World Congress 2000 Contributed Papers 1700, Econometric Society.
    3. Griffith-Jones, Stephany & Montes, Manuel F. & Nasution, Anwar (ed.), 2001. "Short-Term Capital Flows and Economic Crises," OUP Catalogue, Oxford University Press, number 9780198296867.
    4. Frankel, Jeffrey A & Okongwu, Chudozie, 1996. "Liberalized Portfolio Capital Inflows in Emerging Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(1), pages 1-23, January.
    5. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1996. "Inflows of Capital to Developing Countries in the 1990s," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 123-139, Spring.
    6. Manuel F. Montes, 1996. "Country Responses to Massive Capital Flows," WIDER Working Paper Series wp-1996-121, World Institute for Development Economic Research (UNU-WIDER).
    7. Jeffrey D. Sachs & Aaron Tornell & Andrés Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 147-216.
    8. Reinhart, C.M. & Dunaway, S., 1996. "Dealing with Capital Inflows. Are There Any Lessons?," Research Paper 28, World Institute for Development Economics Research.
    9. Yan, Ho-don & Yang, Cheng-lang, 2008. "Foreign Capital Inflows and the Current Account Imbalance: Which Causality Direction?," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 23, pages 434-461.
    10. M S Mohanty & Philip Turner, 2005. "Intervention: what are the domestic consequences?," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 56-81, Bank for International Settlements.
    11. Montes, M.F., 1996. "Country Responses to Massive Capital Flows," Research Paper 121, World Institute for Development Economics Research.
    12. Mr. Jakob E Christensen, 2004. "Capital Inflows, Sterilization, and Commercial Bank Speculation: The Case of the Czech Republic in the Mid-1990's," IMF Working Papers 2004/218, International Monetary Fund.
    13. Herman Kamil, 2008. "Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia," IMF Working Papers 2008/088, International Monetary Fund.
    14. Joseph Joyce & Linda Kamas, 1997. "The relative importance of foreign and domestic shocks to output and prices in Mexico and Colombia," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 133(3), pages 458-478, September.
    15. Rafael Fernández & Clara García, 2018. "Wheels within wheels within wheels: the importance of capital inflows in the origin of the Spanish financial crisis [Current Account Patterns and National Real Estate Markets]," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 42(2), pages 331-353.
    16. Mark M. Spiegel, 1995. "Sterilization of capital inflows through the banking sector: evidence from Asia," Economic Review, Federal Reserve Bank of San Francisco, pages 17-34.
    17. Jean-Louis COMBES & Patrick PLANE & Tidiane KINDA, 2010. "Capital Flows and their Impact on the Real Effective Exchange Rate," Working Papers 201032, CERDI.
    18. Peter Kenen, 1996. "Analyzing and managing exchange-rate crises," Open Economies Review, Springer, vol. 7(1), pages 469-492, March.
    19. Carmen M. Reinhart & Vincent R. Reinhart, 2009. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 5(1), pages 9-62.
    20. Fernandez-Arias, Eduardo & Montiel, Peter J., 1995. "The surge in capital inflows to developing countries : prospects and policy response," Policy Research Working Paper Series 1473, The World Bank.

    More about this item

    Keywords

    Sterilization; Monetary independence; VAR;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:2328. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.