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Regional and Global Capital FlowsMacroeconomic Causes and Consequences$
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Takatoshi Ito Ito and Anne O. Krueger

Print publication date: 2001

Print ISBN-13: 9780226386768

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226387017.001.0001

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

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

Chapter:
(p.197) 6 Sterilization and the Capital Inflow Problem in East Asia, 1987–97
Source:
Regional and Global Capital Flows
Author(s):

Shinji Takagi

Taro Esaka

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226387017.003.0007

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

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