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

IMF Working Papers, December 1, 1994

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

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Bibliographic details

• Authors: Jeffrey A. Frankel
• Published: December 1, 1994
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451857627.001

Summary and central question

• Author: Jeffrey A. Frankel
• Date: December 1, 1994
• Central question: Whether sterilization of reserve inflows is more difficult (Calvo, Leiderman, and Reinhart) or easier (Reisen) than commonly believed.
• Context: Countries undertaking exchange-rate-based stabilization and financial liberalization in Latin America, Asia and elsewhere have faced large capital inflows since 1991 and many have attempted to sterilize reserve inflows.

Main findings and conclusions

• The paper reviews sterilization issues in the simplest textbook model and reaches the following key conclusions:
  • Local interest rates are not likely to rise if the source of the disturbance is an exogenous capital inflow.
  • Local interest rates will rise if the disturbance is an increase in money demand.
  • Local interest rates will rise if the disturbance is an increase in exports.
• The paper contrasts two strands of argument:
  • Calvo, Leiderman, and Reinhart: Sterilization is more difficult than generally realized, largely because of the interest costs on sterilization bonds.
  • Reisen: Sterilization is easier than generally believed.

Policy-relevant implications (implicit from analysis)

• Distinguish sources of monetary disturbances when designing sterilization policy:
  • Exogenous capital inflows: less likelihood of requiring higher local interest rates to achieve sterilization.
  • Increases in money demand or export receipts: greater likelihood that local interest rates must rise.
• Consider interest-cost implications of issuing sterilization bonds when evaluating the feasibility and cost of sterilization.

Subjects and keywords (as listed)

• Subjects: 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