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Limits of monetary policy autonomy and exchange rate flexibility by East Asian central banks

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  • Loeffler, Axel
  • Schnabl, Gunther
  • Schobert, Franziska

Abstract

Given low interest rates in the large industrial countries and buoyant capital inflows into the emerging markets East Asian central banks have accumulated large stocks of foreign reserves. As the resulting easing of monetary conditions has become a threat to domestic price and financial stability, the East Asian central banks have embarked on substantial sterilization operations to absorb what we call surplus liquidity from the domestic banking systems. This has brought the East Asian central banks into debtor positions versus the domestic banking systems. We show based on a central bank loss function that given buoyant capital inflows and exchange rate stabilization the absorption of surplus liquidity leads either to financial repression, or rising inflation or both. Assuming that a debtor central bank moved towards a freely floating exchange rate to gain monetary policy independence, we show that monetary policy independence is undermined by sterilization costs and revaluation losses on foreign reserves.

Suggested Citation

  • Loeffler, Axel & Schnabl, Gunther & Schobert, Franziska, 2013. "Limits of monetary policy autonomy and exchange rate flexibility by East Asian central banks," Working Papers 122, University of Leipzig, Faculty of Economics and Management Science.
  • Handle: RePEc:zbw:leiwps:122
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    References listed on IDEAS

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    13. Andreas Hoffmann & Gunther Schnabl, 2007. "Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets – An Overinvestment View," CESifo Working Paper Series 2100, CESifo Group Munich.
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    Cited by:

    1. Gunther Schnabl & Kristina Spantig, 2016. "(De)Stabilizing Exchange Rate Strategies In East Asian Monetary And Economic Integration," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(02), pages 1-24, June.
    2. Schnabl, Gunther, 2013. "The global move into the zero interest rate and high debt trap," Working Papers 121, University of Leipzig, Faculty of Economics and Management Science.
    3. Ronald Ian McKinnon & Gunther Schnabl, 2014. "China's Exchange Rate and Financial Repression: The Conflicted Emergence of the Renminbi as an International Currency," CESifo Working Paper Series 4649, CESifo Group Munich.

    More about this item

    Keywords

    Debtor Central Banks; Monetary Policy Autonomy; Sterilization; Exchange Rate Regime; East Asia;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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