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Capital Inflows, Sterilization, and Commercial Bank Speculation: The Case of the Czech Republic in the Mid-1990's
Author:
Mr. Jakob E Christensen
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Series:
IMF Working Papers
Volume/Issue:
Volume 2004: Issue 218
Language:
English
Publication Date:
01 Nov 2004
DOI:
https://doi.org/10.5089/9781451875171.001
ISBN:
9781451875171
ISSN:
1018-5941
Pages:
29
Keywords:
WP; exchange rate; capital inflows; sterilization; exchange rate policy; Czech Republic; interest rate relationship; domestic interest rates; interest rate equation; interest rate development; sterilization bond; International reserves; Domestic credit; Conventional peg; Eastern Europe
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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The paper analyzes the relationship between large-scale capital inflows and sterilization efforts in the Czech Republic during 1993–96 using a vector autoregression (VAR) model, which consists of domestic credit, foreign reserves, and domestic and foreign interest rates. The analysis finds that despite initial success in sterilizing capital inflows, this strategy proved increasingly costly and ultimately unsustainable as domestic interest rates attracted more capital inflows. The commercial banks exploited a profitable sterilization game, whereby they borrowed cheaply abroad and invested the funds domestically in high-yielding sterilization bonds.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund