Capital inflows and the interest premium problem: The effects of monetary sterilisation in selected Asian economies

Do managed exchange rates and monetary sterilization encourage capital inflows?

“…Eq (4) represents capital flows as a function of an interest sensitive component (the uncovered interest deviation, i-i � ), a persistence term as captured by lagged capital flows, κ -1 , and a pro-cyclical effect. It is tempting to perhaps specify Eq (4) to capture the components of capital inflow. The current specification keeps the model tractable but still manages to convey the idea that capital inflow source matters to ascertain the effects of sterilization.…”

“…Second, fixed exchange rates may encourage investors to exploit even small interest differentials, thus potentially stimulating capital flows [2]. Third, during prevailing periods of high capital inflow, where FX interventions are partially or completely sterilized by monetary authorities, any interest differential existing before the inflow episode can be preserved, therefore perpetuating the capital inflow episode [3,4].…”

Do sterilized foreign exchange interventions create money?

“…Our main objective is the empirical investigation of the link between FXIs and broad money counterparts. For this purpose we choose vector autoregression (VAR) as our main modelling tool, which is a common choice in the FXI literature (Kim 2003, Cook and Yetman 2012, Blanchard et al 2015, Cavoli and Rajan 2015. 6 We estimate the following panel version of the model:…”

“…Specifically, the common approach in the literature is to examine the outcome of FXIs for reserve money and the central's bank net domestic assets (e.g. Aizenman and Glick 2009, Ouyang and Rajan 2011, Cavoli and Rajan 2015, but it only occasionally refers to broad money developments (Cardarelli et al 2010, Bleaney andDevadas 2017). Presumably, the reason behind such an approach is the tacit existence of a stable relationship between bank reserves and broad money aggregates -the "money multiplier".…”

Do Sterilized Foreign Exchange Interventions Create Money?

“…Our main objective is the empirical investigation of the link between FXIs and broad money counterparts. For this purpose we choose vector autoregression (VAR) as our main modelling tool, which is a common choice in the FXI literature (Kim 2003, Cook and Yetman 2012, Blanchard et al 2015, Cavoli and Rajan 2015. 6 We estimate the following panel version of the model:…”