Foreign Exchange Inflows in Emerging Markets: How Much are They Sterilised?

21 Pages Posted: 7 Apr 2017

See all articles by Michael Bleaney

Michael Bleaney

University of Nottingham - School of Economics

Sharmila Devadas

Central Bank of Malaysia

Date Written: June 2017

Abstract

As some emerging market economies have amassed large quantities of foreign exchange reserves, concern has arisen over the sterilisation of the domestic money stock from these flows. Existing studies focus mostly on narrow (reserve) money, and estimate a high degree of sterilisation. Empirical work on the long‐run relationship between money and prices emphasises broad money, yet the long‐run effect of foreign exchange inflows on broad money has been almost entirely ignored. Using a sample of quarterly data from 28 countries over the period 1990–2010, it is shown that broad money is sterilised to a significantly smaller degree than reserve money, raising concerns about the implications for financial imbalances and inflation. This pattern of sterilisation is not confined to any particular group of countries and is unrelated to the nature of the flows (e.g. current account versus capital account surpluses). Sterilisation rates have increased in Asia during the recent period of persistent accumulation of foreign exchange reserves.

Suggested Citation

Bleaney, Michael and Devadas, Sharmila, Foreign Exchange Inflows in Emerging Markets: How Much are They Sterilised? (June 2017). The Manchester School, Vol. 85, Issue 3, pp. 261-281, 2017, Available at SSRN: https://ssrn.com/abstract=2946555 or http://dx.doi.org/10.1111/manc.12144

Michael Bleaney (Contact Author)

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom
+44 0 115 951 5265 (Phone)
+44 0 115 951 5141 (Fax)

Sharmila Devadas

Central Bank of Malaysia

Jalan Dato' Onn
P.O. Box 10922
Kuala Lumpur, 50929
Malaysia

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