Capital Inflows, Sterilization, and Commercial Bank Speculation : The Case of the Czech Republic in the Mid-1990's

Author/Editor:

Jakob E Christensen

Publication Date:

November 1, 2004

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The paper analyzes the relationship between large-scale capital inflows and sterilization efforts in the Czech Republic during 1993–96 using a vector autoregression (VAR) model, which consists of domestic credit, foreign reserves, and domestic and foreign interest rates. The analysis finds that despite initial success in sterilizing capital inflows, this strategy proved increasingly costly and ultimately unsustainable as domestic interest rates attracted more capital inflows. The commercial banks exploited a profitable sterilization game, whereby they borrowed cheaply abroad and invested the funds domestically in high-yielding sterilization bonds.

Series:

Working Paper No. 04/218

Subject:

English

Publication Date:

November 1, 2004

ISBN/ISSN:

9781451875171/1018-5941

Stock No:

WPIEA2182004

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

29

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