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Sterilized Intervention in Emerging-Market Economies: Trends, Costs, and Risks

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  • Robert Lavigne

Abstract

The author examines recent trends in sterilized intervention among emerging-market economies, to determine the size and extent of this policy in relation to earlier periods of heavy reserve accumulation. He then analyzes whether the domestic costs and risks of substantial and prolonged sterilization are beginning to manifest themselves. In particular, the author discusses the fiscal costs of sterilization and the recent increase in non-market-friendly sterilization methods, such as the rapid rise in reserve requirement ratios.

Suggested Citation

  • Robert Lavigne, 2008. "Sterilized Intervention in Emerging-Market Economies: Trends, Costs, and Risks," Discussion Papers 08-4, Bank of Canada.
    • Handle: RePEc:bca:bocadp:08-4
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    References listed on IDEAS

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    1. Dani Rodrik, 2006. "The social cost of foreign exchange reserves," International Economic Journal, Taylor & Francis Journals, vol. 20(3), pages 253-266.
    2. Nouriel Roubini & Brad Setser, 2005. "Will the Bretton Woods 2 regime unravel soon? the risk of a hard landing in 2005-2006," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
    3. Disyatat, Piti & Galati, Gabriele, 2007. "The effectiveness of foreign exchange intervention in emerging market countries: Evidence from the Czech koruna," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 383-402, April.
    4. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
    5. Reinhart, Carmen M & Reinhart, Vincent R, 1999. "On the Use of Reserve Requirements in Dealing with Capital Flow Problems," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 27-54, January.
    6. Piti Disyatat & Gabriele Galati, 2005. "The effectiveness of foreign exchange intervention in emerging market countries," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 97-113, Bank for International Settlements.
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    Citations

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    Cited by:

    1. Michael Bleaney & Sharmila Devadas, 2017. "Foreign Exchange Inflows in Emerging Markets: How Much are they Sterilised?," Manchester School, University of Manchester, vol. 85(3), pages 261-281, June.
    2. Hoda Selim, 2012. "Has Egypt'S Exchange Rate Policy Changed After The Float?," Middle East Development Journal (MEDJ), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 1-27.
    3. James Riedel, 2018. "The costs and benefits of exchange rate protection in China," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 32(1), pages 3-17, May.
    4. Aman Saggu & Witada Anukoonwattaka, 2015. "Commodity Price Crash: Risks to Exports and Economic Growth in Asia-Pacific LDCs and LLDCs," Trade Insights Series 6, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
    5. Djedaiet Aissa & Ayad Hicham, 2022. "Hard currency inflows and sterilization policy in Algeria," SN Business & Economics, Springer, vol. 2(9), pages 1-16, September.
    6. repec:zbw:bofitp:2013_005 is not listed on IDEAS
    7. Andrew J. Filardo & Pierre L. Siklos, 2016. "Prolonged Reserves Accumulation, Credit Booms, Asset Prices and Monetary Policy in Asia," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(2), pages 364-381, February.
    8. Yun, Youngjin, 2020. "Reserve accumulation and bank lending: Evidence from Korea," Journal of International Money and Finance, Elsevier, vol. 105(C).
    9. Smita Roy Trivedi & Bobby Srinivasan, 2016. "Impact of Central Bank Intervention in the Foreign Exchange Market: Evidence from India Using an Event Study Approach," Economic Papers, The Economic Society of Australia, vol. 35(4), pages 389-402, December.
    10. Gervais, Olivier & Schembri, Lawrence & Suchanek, Lena, 2016. "Current account dynamics, real exchange rate adjustment, and the exchange rate regime in emerging-market economies," Journal of Development Economics, Elsevier, vol. 119(C), pages 86-99.
    11. Andreas Steiner, 2010. "Central Banks’ Dilemma: Reserve Accumulation, Inflation and Financial Instability," IEER Working Papers 84, Institute of Empirical Economic Research, Osnabrueck University.
    12. Prasad, Nalini, 2018. "Sterilized interventions and capital controls," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 101-121.
    13. Herman Kamil, 2008. "Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia," IMF Working Papers 2008/088, International Monetary Fund.
    14. Emad Omar Elhendawy, 2015. "Sterilization and Inflation in the Long-Term Empirical Evidence from Egypt," Applied Economics and Finance, Redfame publishing, vol. 2(2), pages 68-78, May.
    15. Marc Lavoie & Peng Wang, 2012. "The ‘compensation’ thesis, as exemplified by the case of the Chinese central bank," International Review of Applied Economics, Taylor & Francis Journals, vol. 26(3), pages 287-301, April.

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    More about this item

    Keywords

    Financial stability; Exchange rate regimes; International topics;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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