Do sterilized foreign exchange interventions create money?

Alexey Ponomarenko

No wps40, Bank of Russia Working Paper Series from Bank of Russia

Abstract: When a central bank accumulates foreign reserves, there are two possible ways of balance of payments adjustment: (1) decreasing commercial banks’ net foreign assets and (2) decreasing the non-banking sector’s net foreign assets and/or increasing the current account surplus. In the latter case, money is created. It does not matter whether the central bank sterilizes the bank reserves that it supplied to the money market and prevents the interest rate change – money will be created anyway (although sterilization may prevent further money creation through credit extension). Our empirical analysis shows that for emerging markets the type (2) adjustment is more common than type (1). Therefore, the accumulation of foreign reserves is likely to create money even when sterilized (i.e. it does not lead to lower money market interest rates).

Keywords: Money supply; credit; foreign exchange interventions; foreign exchange reserves; emerging markets. (search for similar items in EconPapers)
JEL-codes: E51 E58 F31 G21 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2019-05
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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