Monetary sterilization and dual nominal anchors: some Caribbean examples

Tarron Khemraj and Sukrishnalall Pasha

MPRA Paper from University Library of Munich, Germany

Abstract: This paper notes that a high sterilization coefficient plus a de facto pegged exchange rate indicates the existence of dual nominal anchors. The econometric evidence presented shows that several Caribbean economies with fixed exchange rate regimes also possess high sterilization coefficients. Given open capital accounts in the various economies, the paper argues that this finding contravenes the money neutrality thesis, which holds that only one nominal anchor can prevail in the long-term. The paper presents a simple theoretical model to explain this phenomenon. The model combines the liquidity preference of commercial banks with an augmented uncovered interest parity equation.

Keywords: sterilization coefficient; dual nominal anchors; foreign exchange regime (search for similar items in EconPapers)
JEL-codes: E02 F31 F41 O11 (search for similar items in EconPapers)
Date: 2011-03-01
New Economics Papers: this item is included in nep-mon
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