Portfolio Balance and Balance of Payments Sterilization

Walter Enders

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Current interest in the monetary theory of the balance of payments has spurred interest in both the static and dynamic and effects of central bank sterilization policies.— In particular, the monetary approach to the balance of payments demonstrates that an improper rate of monetary expansion will lead to an official settlements deficit or surplus. As sterilization policies alter the rate of growth of the domestic money supply, it is important to determine how sterilization affects the balance of payments. The ongoing debate concerning the relative merits of fixed versus flexible exchange rates also serves to underline the importance of balance of payments sterilization. Proponents of flexible exchange rates argue that monetary independence cannot be attained under a pegged rate regime, whereas advocates of fixed rates claim that sterilization can lead to monetary independence even if the exchange rate is pegged.

Date: 1975-10-01
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