Capital Flows and Money Supply: The Degree of Sterilisation in Pakistan

Qayyum, Abdul and Khan, Arshad (2003): Capital Flows and Money Supply: The Degree of Sterilisation in Pakistan. Published in: The Pakistan Development Review , Vol. 42, No. 4 (2003): pp. 975-985.

Abstract

In this study an attempt has been made to develop and estimate the domestic credit policy reaction function to analyse the monetary implications of interventions and sterilisation policy in Pakistan using quarterly data ranging from 1982 Q3 through 2001 Q2. By employing Johansen multivariate cointegration technique, this paper has considered the degree of sterilisation that the Pakistan has used in controlling capital flows. The evidence suggests that Pakistan sterilises around 72 percent of international reserve inflows in the long-run while 88 percent in the short-run during the period of study.

• Item Type: MPRA Paper
• Institution: Pakistan Institute of Development Economics
• Language: English
• Keywords: Money Supply; sterlization; capital inflow; dometic credit; unit root; cointegration
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

References

Arango, S., and M. Nadiri (1981) Demand for Money in Open Economies. Journal of Monetary Economics 7, 69–83. Argy, V., and P. Kouri (1974) Sterilisation Policies and the Volatility in International Reserves. In R. Z. Aliber (ed.) National Monetary Policies and the International Financial System. Chicago: University of Chicago Press. 209–230. Bahmani-Oskooee, M., and H. J. Rhree (1994) Long-run Elasticities of the Demand for Money in Korea: Evidence from Cointegration Analysis. International Economic Journal 8:2, 83–93. Bahmani-Oskooe, M. (1996) The Black Market Exchange Rate and Demand for Money in Iran. Journal of Macroeconomics 18, 171–176. Bahmani-Oskooe, M., and A. Techaratanachai (2001) Currency Substitution in Thailand. Journal of Policy Modelling 23, 141–145. Booth, G., and M. Chowdhury (1992) Canadian Foreign Exchange Policies: Intervention, Control, Cointegration. Weltwirtschafliches Archv 128:1, 21–33. Banerjee, A., J. J. Dolado, J. W. Galbraith, and D. F. Hendry (1993) Cointegration, Error-Correction, and the Econometric Analysis of Non-stationary Data. Advanced Texts in Econometrics. Oxford: Oxford University Press, UK. Connolly, M., and D. Taylor (1989) Adjustment to Interest Rate Shocks in Latin America and the Caribbean. In P. Brock, M. Connolly and C. Gonzalez-Vega (eds.) Latin American Debt and Adjustment: External Shocks and Macroeconomic Policies. New York: Praeger. 80–95. Goldstein, M., and M. S. Khan (1976) Large Versus Small Price Changes in the Demand for Imports. IMF Staff Papers 23, 200–225. International Monetary Fund (Various Issues) International Financial Statistics (IFS). Inoguchi, M. ( 2003) How did the Bank of Thailand Respond to Capital Inflows Before a Crisis? Sterilisation and Base Money in The 1990s. The Singapore Economic Review 48:1, 39–60. Johansen, S. (1988) Statistical Analysis of Cointegration Vectors. Journal of Economic Dynamics and Control 12, 231–254. Johansen, S., and K. Juselius (1990) Maximum Likelihood Estimation and Inference on Cointegration—with Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics 52, 169–210. Kouri, P., and M. Porter (1974) International Capital Flows and Portfolio Equilibrium. Journal of Political Economy 82, 443–467. McNown, R., and M. Wallace ( 1992) Cointegration Tests of a Long-run Relation between Money Demand and the Effective Exchange Rate. Journal of International Money and Finance 11, 107–114. Mackinnon, J. (1991) Critical Values for Cointegration Tests. In R. F. Engle and C. W. J. Granger (eds.) Long-run Economic Relationships: Reading in Cointe-gration. Chapter 13. Oxford: Oxford University Press, UK. Naumann, M. J. M. (1984) Intervention in the Mark-Dollar Market: The Authorities Reaction Function. Journal of International Money and Finance 3, 223–239. Obstfeld, M. (1983) Exchange Rate, Inflation and the Sterilisation Problem: Germany, 1975–1981. European Economic Review 21, 161–189. Osterwald-Lemun, M. (1992) A Note with Quantiles of the Asymptotic Distribution of the ML Cointegration Rank Test Statistics. Oxford Bulletin of Economics and Statistics 54, 461–472. Pasula, K. (1994) Sterilisation, Ricardian Equivalence and Structural and Reduced Form Estimates of the Offset Coefficient. Journal of Macroeconomics 111:4, 683–699. State Bank of Pakistan (2003) State of Pakistan’s Economy: First Quarterly Report for FY03. State Bank of Pakistan (Various Issues) Annual Reports for FY01, FY02 and FY03. Tower, E. (1975) Money Demand and the Term of Trade. Weltwirtschaftliches Archiv 111:4, 623–33. Ujiie, J. (1978) A Stock Adjustment Approach to Monetary Policy and the Balance of Payments in the Economics of Exchange Rates. In Frenkel and H. Johnson (eds.) Selected Studies. Longmand: Addison-Wesley. 179–92.