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Sterilisation, Capital Mobility and Interest Rate Determination for East Asia

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  • Tony Cavoli

    (School of Economics, University of Adelaide)

Abstract

This paper uses a simple open economy interest rate determination model to empirically examine an important aspect of pre-crisis monetary and exchange rate policy. It investigates whether sterilisation of the reserve effects of capital inflows helped keep interest rates sufficiently high that they may have prolonged the inflow of capital. Despite the use of a pre-crisis sample in this study, the issues in this paper have relevance today given the recent trend in foreign capital inflow for Asia. The empirical section is concerned with the effect of reserve flows on the interest rate and is divided into two parts. The first tests for a contemporaneous effect of the basic model using OLS and IV methods. The second generalises the model to assess for lagged effects by way of VAR analysis. The results show that there are some contemporaneous effects of sterilisation on the domestic interest rate though the effects are stronger when estimating the lagged model.

Suggested Citation

  • Tony Cavoli, 2005. "Sterilisation, Capital Mobility and Interest Rate Determination for East Asia," School of Economics and Public Policy Working Papers 2005-05, University of Adelaide, School of Economics and Public Policy.
    • Handle: RePEc:adl:wpaper:2005-05
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    File URL: https://media.adelaide.edu.au/economics/papers/doc/wp2005-05.pdf
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    References listed on IDEAS

    as
    1. George Fane, 2000. "Capital Mobility, Exchange Rates and Economic Crises," Books, Edward Elgar Publishing, number 1466.
    2. Glick,Reuven & Hutchison,Michael (ed.), 1994. "Exchange Rate Policy and Interdependence," Cambridge Books, Cambridge University Press, number 9780521461108, January.
    3. Frankel, Jeffrey A & Okongwu, Chudozie, 1996. "Liberalized Portfolio Capital Inflows in Emerging Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(1), pages 1-23, January.
    4. Jeffrey A. Frankel & Chudozie Okongwu, 1995. "Liberalized Portfolio Capital Inflows in Emerging Capital Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence," NBER Working Papers 5156, National Bureau of Economic Research, Inc.
    5. de Brouwer,Gordon, 1999. "Financial Integration in East Asia," Cambridge Books, Cambridge University Press, number 9780521651486, January.
    6. Anker, Peter, 1999. "Uncovered interest parity, monetary policy and time-varying risk premia," Journal of International Money and Finance, Elsevier, vol. 18(6), pages 835-851, December.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Igor Ljubaj & Ana Martinis & Marko Mrkalj, 2010. "Capital Inflows and Efficiency of Sterilisation – Estimation of Sterilisation and Offset Coefficients," Working Papers 24, The Croatian National Bank, Croatia.

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    More about this item

    Keywords

    sterilisation; capital flows; interest rates;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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