Limits of Monetary Policy Autonomy by East Asian Debtor Central Banks

32 Pages Posted: 29 Feb 2012

See all articles by Axel Loeffler

Axel Loeffler

Deutsche Bundesbank

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Franziska Schobert

Deutsche Bundesbank

Date Written: February 28, 2012

Abstract

Due to buoyant capital inflows East Asian central banks with exchange rate targets accumulate foreign reserves and thereby increase surplus liquidity. East Asian central banks with more flexible exchange rate regimes also face surplus liquidity that mainly emanates from past accumulation of foreign reserves. We show based on an augmented Barro-Gordon-type central bank loss function that in both cases surplus liquidity limits monetary policy autonomy. In case of fixed exchange rates East Asian central banks can escape from the impossible trinity and gain monetary policy autonomy by using non-market–based sterilization which leads to financial sector distortions. In a flexible exchange rate regime monetary policy autonomy can be gained without financial sector distortions by using market-based sterilization. As central banks face substantial sterilization costs as well as revaluation losses on foreign reserves, however, monetary policy autonomy is eroded.

Keywords: debtor central banks, monetary policy autonomy, sterilization, exchange rate regime, East Asia

JEL Classification: E520, E580, F310

Suggested Citation

Loeffler, Axel and Schnabl, Gunther and Schobert, Franziska, Limits of Monetary Policy Autonomy by East Asian Debtor Central Banks (February 28, 2012). CESifo Working Paper Series No. 3742. Available at SSRN: https://ssrn.com/abstract=2012274

Axel Loeffler

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Straße 14
Frankfurt am Main, 60431
Germany
+49 69 9566 2966 (Phone)

HOME PAGE: http://www.bundesbank.de

Gunther Schnabl (Contact Author)

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Straße 12
Leipzig, 04109
Germany

HOME PAGE: http://www.wifa.uni-leipzig.de/iwp/

Franziska Schobert

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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