Summary of WP/94/159: “Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?”

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

Abstract

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

After seven years of sharply reduced lending to developing countries, capital inflows once again began to surge in 1990. Although these inflows have gone partly to finance renewed trade deficits in some countries, they have also showed up as renewed surpluses on the overall balance of payments. In many countries, fears that increases in the money supply would be inflationary have prompted the central banks to attempt to sterilize the inflows. For the purposes of this paper, sterilization refers to offsetting policy measures by the central bank to leave the aggregate money supply unchanged.

In the context of the simplest textbook model, this paper reviews the arguments of Calvo and Reisen concerning the ease or difficulty of sterilizing inflows of money to countries undergoing exchange rate-based stabilization and financial liberalization. It concludes that local interest rates are not likely to rise if the source of the disturbance is an exogenous capital inflow but will rise if the disturbance is an increase in money demand or in exports. In every case, sterilized intervention will cause interest rates to be higher than if the inflow took place unsterilized.

Although it is difficult to distinguish the source of a disturbance or its likely duration, an attempt to discern this information is likely to be useful in deciding the appropriate response, regardless of the model.

Working Paper Summaries (WP/94/77 - WP/94/147)
Author: International Monetary Fund