Chapter

Sterilization and the Capital Inflow Problem in East Asia, 1987–97

Shinji Takagi and Taro Esaka

in Regional and Global Capital Flows

Published by University of Chicago Press

Published in print July 2001 | ISBN: 9780226386768
Published online February 2013 | e-ISBN: 9780226387017 | DOI: http://dx.doi.org/10.7208/chicago/9780226387017.003.0007
Sterilization and the Capital Inflow Problem in East Asia, 1987–97

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This chapter investigates how monetary authorities responded to large and rapidly increasing capital inflows. It indirectly tests whether tight monetary policy measures—described broadly as “sterilization”—promoted additional capital inflows through keeping the level of interest rates high, by examining the effectiveness of sterilization in limiting the impact of reserve inflows on the growth of monetary aggregates. The chapter is organized as follows. Section 6.2 presents an overview of the capital inflow episode in the context of Indonesia, Korea, Malaysia, the Philippines, and Thailand, by emphasizing the relationship between the capital inflows and the growth of monetary aggregates. Section 6.3 summarizes the policy responses, collectively called “sterilization,” taken by the East Asian monetary authorities to limit the expansionary impact of reserve inflows on the growth of monetary aggregates. Section 6.4 tests for the effectiveness of sterilization in limiting the growth of monetary aggregates, by using both time series and structural approaches. Finally, Section 6.5 presents concluding remarks. Two commentaries are included at the end of the chapter.

Keywords: monetary policy; capital inflows; interest rates; Indonesia; Korea; Malaysia; Philippines; Thailand; reserve inflows; monetary aggregates

Chapter.  11407 words.  Illustrated.

Subjects: International Economics

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