Khemraj, Tarron and Pasha, Sukrishnalall (2011): Monetary sterilization and dual nominal anchors: some Caribbean examples.
Download (288kB) | Preview
This paper notes that a high sterilization coefficient plus a de facto pegged exchange rate indicates the existence of dual nominal anchors. The econometric evidence presented shows that several Caribbean economies with fixed exchange rate regimes also possess high sterilization coefficients. Given open capital accounts in the various economies, the paper argues that this finding contravenes the money neutrality thesis, which holds that only one nominal anchor can prevail in the long-term. The paper presents a simple theoretical model to explain this phenomenon. The model combines the liquidity preference of commercial banks with an augmented uncovered interest parity equation.
|Item Type:||MPRA Paper|
|Original Title:||Monetary sterilization and dual nominal anchors: some Caribbean examples|
|Keywords:||sterilization coefficient, dual nominal anchors, foreign exchange regime|
|Subjects:||E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy
O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
|Depositing User:||Tarron Khemraj|
|Date Deposited:||04 Nov 2011 01:58|
|Last Modified:||24 Jul 2016 12:47|
Aizenman, J. and Glick, R. (2008), “Sterilization, monetary policy, and global financial integration”, NBER Working Paper No. 13902, National Bureau of Economic Research.
Birchwood, A. and Seerattan, D. (2006), “Financial market integration, arbitrage and interest rate parity in the Caribbean”, in Birchwood, A. and Seerattan, D. (ed.) Finance and Real Development in the Caribbean, Caribbean Centre for Monetary Studies, St. Augustine.
Boamah, D.; Craigwell, R.; Downes, D. and Mitchell, T. (2005), “Does capital account liberalization lead to investment booms in Caribbean economies?” Paper Presented at the XXXVII Annual Conference, Caribbean Centre for Monetary Studies, University of West Indies.
Brissimis, S.; Gibson, H. and Tsakalotos, E. (2002), “A unifying framework for analyzing offsetting capital flows and sterilization: Germany and the ERM”, International Journal of Finance and Economics, Vol. 7 No. 1, pp. 63-78.
Cleveland, W. (1993), Visualizing Data, Hobart Press, Murray Hill, NJ.
Cumby, R. and Obstfeld, M. (1984), “Capital mobility and the scope for sterilization: Mexico in the 1970s”, NBER Working Paper No. 770, National Bureau of Economic Research.
Disyadat, P. and Galati, G. (2005), “The effectiveness of foreign exchange interventions in emerging market countries: evidence from Czech koruna”, BIS Working Papers No. 172, Bank for International Settlements.
Frankel, J. (1997), “Sterilization of money inflows: difficult (Calvo) or easy (Reisen)?” Estudios de Economia, Vol. 24 No. 2, pp. 263-285.
Frost, P. (1971), “Banks’ demand for excess reserves”, Journal of Political Economy, Vol. 79 No. 4, pp. 805-825.
Goodhart, C. A. E. (2009). “The continuing muddles of monetary theory: a steadfast refusal to face facts”, Economica, Vol. 76 No. 1, pp. 821-830.
Herring, R. and Marston, R. (1977), “Sterilization policy: the trade-off between monetary autonomy and control over foreign exchange reserves”, European Economic Review, Vol. 10 No. 3, pp. 325-343.
Huang, G. (1995), “Modeling China’s demand for international reserves”, Applied Financial Economics, Vol. 5 No. 5, pp. 357-366.
I.M.F. (2006), “De facto classification of exchange rate regimes and monetary policy framework”, International Monetary Fund, http://www.imf.org/external/np/mfd/er/2006/eng/0706.htm.
Jara, A. and Tovar, C. (2008), “Monetary and financial stability implications of capital flows in Latin America and the Caribbean”, BIS Papers No. 43, Bank for International Settlements.
Keynes, J. M. (1936, reprinted 1994), The General Theory of Employment, Interest, and Money, A Harvest Book; Harcourt Brace & Company: London.
Khatkhate, D. and Short, B. (1980), “Monetary and central banking problems of mini states”, World Development, Vol. 8 No. 12, pp. 1017-1025.
Kouri, P. and Porter, M. (1974), “International capital flows and portfolio equilibrium”, Journal of Political Economy, Vol. 82 No. 3, pp. 443-467.
Kwack, S. (2001), “An empirical assessment of monetary policy responses to capital inflows in Asia before the financial crisis”, International Economic Journal, Vol. 15 No. 1, pp. 95-113.
Mohanty, M. and Turner, P. (2005), “Intervention: what are the domestic consequences?” BIS Papers No. 24, Bank for International Settlements.
Montiel, P. (2003), Macroeconomics in Emerging Markets, Cambridge University Press: Cambridge.
Moore, W. and Craigwell, R. (2002), “Market power and interest rate spread in the Caribbean”, International Review of Applied Economics, Vol. 16 No. 4, pp. 391-405.
Obstfeld, M. (1982), “Can we sterilize? Theory and evidence”, American Economic Review, Vol. 72 No. 2, pp. 45-50.
Obstfeld, M. and Rogoff, K. (1995), “The mirage of fixed exchange rates”, Journal of Economic Perspectives, Vol. 9 No. 4, pp. 73-96.
Ramlogan, C. (2004), “The transmission mechanism of monetary policy: evidence from the Caribbean”, Journal of Economic Studies, Vol. 31 No. 5, pp. 435-447.
Sarno, L. and Taylor, M. (2001), “Official intervention in the foreign exchange market: is it effective and, if so, how does it work?” Journal of Economic Literature, Vol. 39 No. 3, pp. 839-868.
Siklos, P. (2000), “Capital flows in a transitional economy and the sterilization dilemma: the Hungarian experience, 1992-97”, Journal of Policy Reform, Vol. 3 No. 4, pp. 373-392.
Verbeek, M. (2004), A Guide to Modern Econometrics, 2nd edition, John Wiley & Sons, Chichester, West Sussex.
Wooldridge, J. (2009), Introductory Econometrics: A Modern Approach, 4th edition, South-Western Cengage Learning, Mason, Ohio.
Worrell, D. (2003), “A currency union for the Caribbean”, IMF Working Paper WP/03/35, International Monetary Fund.
Worrell, D.; Craigwell, R. and Mitchell, T. (2008), “The behavior of a small foreign exchange market with a long-term peg – Barbados”, Applied Financial Economics, Vol. 18 No. 8, pp. 673-682.
Worrell, D.; Codrington, H.; Craigwell, R. and Grenidge, K. (2003), “Economic Resilience with an exchange rate peg: the Barbados experience, 1985-2000”, IMF Working Paper WP/03/168, International Monetary Fund.