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Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?

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  • Jeffrey A. Frankel.

Abstract

Some countries undergoing exchange-rate-based stabilization and financial liberalization in Latin America and elsewhere have faced large capital inflows since 1991. Many have tried to sterilize the reserve inflows. Calvo and coauthors argue essentially that sterilization is more difficult than generally realized, due to the interest costs on sterilization bonds. Reisen argues essentially that sterilization in easier than generally believed. This paper reviews the issues in the simplest textbook model. The conclusions are that local interest rates are not likely to rise if the source of the disturbance is an exogenous capital inflow, but will rise if the disturbance is an increase is money demand or an increase in exports. In every case, sterilized intervention will leave interest rates higher than they would be if the inflow took place unsterilized. The case where the domestic money supply and the rest of the economy are insulated from foreign disturbances despite perfect capital mobility and a fixe
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Suggested Citation

  • Jeffrey A. Frankel., 1993. "Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?," Center for International and Development Economics Research (CIDER) Working Papers C93-024, University of California at Berkeley.
  • Handle: RePEc:ucb:calbcd:c93-024
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    References listed on IDEAS

    as
    1. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994. "The Capital Inflows Problem: Concepts And Issues," Contemporary Economic Policy, Western Economic Association International, vol. 12(3), pages 54-66, July.
    2. 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.
    3. Mohsin S. Khan, 1985. "An Analytical Approach to Interest Rate Determination in Developing Countries," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 24(3-4), pages 481-495.
    4. Gikas Hardouvelis & Rafael La Porta & Thierry A. Wizman, 1994. "What Moves the Discount on Country Equity Funds?," NBER Chapters,in: The Internationalization of Equity Markets, pages 345-403 National Bureau of Economic Research, Inc.
    5. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, January.
    6. Frankel, Jeffrey A & Chinn, Menzie D, 1993. "Exchange Rate Expectations and the Risk Premium: Tests for a Cross Section of 17 Currencies," Review of International Economics, Wiley Blackwell, vol. 1(2), pages 136-144, June.
    7. Kamas, Linda, 1985. "External disturbances and the independence of monetary policy under the crawling peg in Colombia," Journal of International Economics, Elsevier, vol. 19(3-4), pages 313-327, November.
    8. Guillermo A. Calvo, 1991. "The Perils of Sterilization," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 921-926, December.
    9. Sebastian Edwards & Mohsin S. Khan, 1985. "Interest Rate Determination in Developing Countries: A Conceptual Framework," NBER Working Papers 1531, National Bureau of Economic Research, Inc.
    10. Edwards, Sebastian, 1985. "Money, the Rate of Devaluation, and Interest Rates in a Semiopen Economy: Colombia, 1968-82," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 59-68, February.
    11. Kamas, Linda, 1986. "The Balance of Payments Offset to Monetary Policy: Monetarist, Portfolio Balance, and Keynesian Estimates for Mexico and Venezuela," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 467-481, November.
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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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