Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?

Jeffrey Frankel

No 1994/159, IMF Working Papers from International Monetary Fund

Abstract: Some countries undergoing exchange-rate-based stabilization and financial liberalization in Latin America, Asia and elsewhere have faced large capital inflows since 1991. Many have tried to sterilize the reserve inflows. Calvo, Leiderman, and Reinhart argue essentially that sterilization is more difficult than generally realized, due to the interest costs on sterilization bonds. Reisen argues essentially that sterilization is easier than generally believed. This paper reviews the issues in the simplest textbook model and concludes that local interest rates are not likely to rise if the source of the disturbance is an exogenous capital inflow, but will rise if the disturbance is an increase in money demand or an increase in exports.

Keywords: WP; interest rate; central bank; capital; capital mobility; money stock; price level; exchange rate peg; interest rate differential; central bank sell; mobility case; heightened interest rate; world interest rates; money inflow; government securities market; money supply increase; Exchange rates; Monetary base; Sterilization; Demand for money; Bonds; East Asia; Southeast Asia (search for similar items in EconPapers)
Pages: 38
Date: 1994-12-01
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Citations: View citations in EconPapers (33)

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Related works:
Journal Article: Sterilization of money inflows: Difficult (Calvo) or Easy (Reisen)? (1997)
Working Paper: Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)? (1993)
Working Paper: Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)? (1993)
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