Reserve Accumulation, Sterilization, and Policy Dilemma

Date: October 2004
Type: Papers and Briefs
Country:
Subject:
Series: ERD Policy Briefs
ISSN: 1655-5260 (print)

Description

Surges in capital inflows distort relative prices, exacerbate weakness in a nation's financial sector, and feed asset-price bubbles. A capital inflow represents an increase in the demand for a country's assets--thus, in the absence of policy intervention, the currency tends to appreciate on foreign exchange markets. Hence, when purchasing foreign exchange brings inflationary pressures through an increase in reserve money, monetary authorities step in to sterilize the excessive liquidity to mitigate inflationary pressures and real exchange rate appreciation and to avoid the loss of control over the domestic money stock.

Contents

  • Introduction
  • Sterilization Policies, Channels for Impacts and Evidence
  • Sterilization Intervention: Country Experiences
    • People's Republic of China
    • India
  • Concluding Remarks
  • References