Do managed exchange rates and monetary sterilization encourage capital inflows?

Abstract

Economies with exchange rate pegs generally attract higher capital inflows either through lower transaction costs of trade and finance, or by encouraging investors to exploit any interest differentials, or where foreign exchange (FX) interventions are sterilized, any previous interest differentials are preserved. This paper examines these relationships using FDI, portfolio and bank inflows for 28 emerging market economies. We find that greater fixity of the exchange rate and sterilized intervention can potentially encourage capital inflows, and that the effect is magnified when combined. Further, we find that the effect differs by region, and it is larger for higher inflows.

Does Sterilization Policy Exert an Upward Pressure on Interest Rate as Dictated by Theory? A Nigerian Example

“…In a country-specific study for Algeria, Djedaiet and Ayad (2017) showed evidence of full sterilization by the Algerian Bank, while in another cross-country study involving some emerging market economies; Ponomarenko (2019) found an incomplete sterilization. Arya, Cavoli, and Onur (2020) examines the relationship between foreign exchange rate and sterilization in 28 emerging market economies and showed that greater fixity of the exchange rate and sterilized intervention can potentially encourage capital inflows. In another for Nigeria, Nzeh, Nwogwugwu, Uzoechina, Chiedo, and Anyachebelu (2020) showed that the degree of sterilization is relatively high and significant and that there is also significant but low capital mobility.…”