Sterilization and Monetary Control under Pegged Exchange Rates: Theory and Evidence / Michael R. Darby.

By:

Darby, Michael R

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0449.Publication details: Cambridge, Mass. National Bureau of Economic Research 1980.Description: 1 online resource: illustrations (black and white)Subject(s):

F - International Economics

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: In veiw of recent strong evidence that substantial sterilization of the monetary effects of reserve flows occurs, a modified monetary approach model is formulated in which central banks exercise no control over their domestic money supply despite their sterilization activities. This model is compared with a more general model in which the balance of payments and domestic money supply are both influenced by the central bank's domestic policy goals. In order for the central bank to exercise monetary control, three conditions must be met: assets are not perfect substitutes, goods are not perfect substitutes, and expected depreciation is not "too -responsive" to the balance of payments. The third condition may be met for small but not large reserve flows. Reduced form tests are derived which show for Canada, France, Germany, Italy, Japan, th Netherlands, and the United Kingdom that domestic policy goals strongly influenced quarterly changes in the domestic money supply; this strongly contradicts both the modified and standard monetary approach to the balance of payments. Thus there is a relevant "short-run" in which monetary authorities exercise monetary control. The paper concludes that the simpler monetary approach is no longer empirically tenable for analysis of quarterly data and that more general simultaneous models must be specified and tested.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w0449 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w0446 The Evolution of the American Labor Market 1948-1980 /	nber w0447 Mortgage Revenue Bonds: Tax Exemption with a Vengeance /	nber w0448 The Distribution of the U.S. Capital Stock Between Residential and Industrial Uses /	nber w0449 Sterilization and Monetary Control under Pegged Exchange Rates: Theory and Evidence /	nber w0450 Flexible Exchange Rates in the 1970's /	nber w0451 Dynamic Aspects of of Children's Health, Intellectual Development, and Family Economic Status /	nber w0452 Exchange Rates, Prices and Money: Lessons from the 1920s /	Next

February 1980.

In veiw of recent strong evidence that substantial sterilization of the monetary effects of reserve flows occurs, a modified monetary approach model is formulated in which central banks exercise no control over their domestic money supply despite their sterilization activities. This model is compared with a more general model in which the balance of payments and domestic money supply are both influenced by the central bank's domestic policy goals. In order for the central bank to exercise monetary control, three conditions must be met: assets are not perfect substitutes, goods are not perfect substitutes, and expected depreciation is not "too -responsive" to the balance of payments. The third condition may be met for small but not large reserve flows. Reduced form tests are derived which show for Canada, France, Germany, Italy, Japan, th Netherlands, and the United Kingdom that domestic policy goals strongly influenced quarterly changes in the domestic money supply; this strongly contradicts both the modified and standard monetary approach to the balance of payments. Thus there is a relevant "short-run" in which monetary authorities exercise monetary control. The paper concludes that the simpler monetary approach is no longer empirically tenable for analysis of quarterly data and that more general simultaneous models must be specified and tested.