Offsetting and Sterilization Mechanisms in Argentina (1992-2014)

Abstract

We test the existence and extent of capital flows as an offset to monetary policy in Argentina from 1992-2014. After providing an analysis of Argentina’s past and current economic conditions, a theoretical framework of the offset and sterilization mechanisms will be provided. Then, with the use of VAR and IRF analysis, it is shown that a one standard deviation shock to monetary policy (measured by changes in net domestic assets) is offset between 27%-32% by responsive capital flows (measured by changes in net foreign assets). Furthermore, the results indicate that the Argentine government more than sterilizes shocks to capital flows through compensation of expansionary monetary policy.

Keywords: Argentina; foreign exchange market; offset mechanism; sterilization; capital flows

JEL Classification: E52, E58, F31