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

December 1, 1994

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Format: Chicago

Jeffrey A. Frankel Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?, (USA: International Monetary Fund, 1994) accessed September 18, 2024

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

Some countries undergoing exchange-rate-based stabilization and financial liberalization in Latin America, Asia and elsewhere have faced large capital inflows since 1991. Many have tried to sterilize the reserve inflows. Calvo, Leiderman, and Reinhart argue essentially that sterilization is more difficult than generally realized, due to the interest costs on sterilization bonds. Reisen argues essentially that sterilization is easier than generally believed. This paper reviews the issues in the simplest textbook model and concludes 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 in money demand or an increase in exports.

Subject: Banking, Bonds, Central banks, Demand for money, Exchange rates, Financial institutions, Foreign exchange, Monetary base, Money, Sterilization

Keywords: Bonds, Capital, Capital mobility, Central bank, Central bank sell, Demand for money, East Asia, Exchange rate peg, Exchange rates, Government securities market, Heightened interest rate, Interest rate, Interest rate differential, Mobility case, Monetary base, Money inflow, Money stock, Money supply increase, Price level, Southeast Asia, Sterilization, World interest rates, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1994/159
Stock No:

WPIEA1591994
ISBN:

9781451857627
ISSN:

1018-5941

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