Sterilization and Offsetting Capital Movements: Evidence from West Germany, 1960-1970

53 Pages Posted: 21 Mar 2001

See all articles by Maurice Obstfeld

Maurice Obstfeld

University of California, Berkeley; Peterson Institute for International Economics; National Bureau of Economic Research; Centre for Economic Policy Research

Date Written: June 1980


The purpose of this paper is two fold. First, to estimate, using structural methods, the extent to which capital flows undermined West German monetary policy during the Bretton Woods years 1960 to 1970 and second, to show that earlier reduced form estimates of the capital-account offset coefficient are tainted by simultaneity bias thanks to the Deutsche Bundesbank's systematic policy of sterilization, and so overestimate the true coefficient. The paper distinguishes between the short-run or one-quarter offset coefficient and the long-run coefficient implied by the full adjustment of all asset markets. An aggregative structural model German financial markets yields short-run coefficients between .50 and .65implying substantial Bundesbank control over the monetary base, at least in the short-run. A formal test for simultaneous-equations bias provides evidence that variations in domestic credit cannot be regarded as exogenous and that equations regressing capital flows on changes in domestic credit and other variables exaggerate the extent of the offset.

Suggested Citation

Obstfeld, Maurice, Sterilization and Offsetting Capital Movements: Evidence from West Germany, 1960-1970 (June 1980). NBER Working Paper No. w0494. Available at SSRN:

Maurice Obstfeld (Contact Author)

University of California, Berkeley ( email )

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Berkeley, CA 94720
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Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Centre for Economic Policy Research ( email )

United Kingdom

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