Do Sterilized Foreign Exchange Interventions Create Money?
20 Pages Posted: 4 Dec 2017
Date Written: November 29, 2017
When a central bank accumulates foreign reserves, there are two possible ways of balance of payments adjustment:
(1) decreasing commercial banks’ net foreign assets and,
(2) decreasing the non-banking sector’s net foreign assets and/or increasing the current account surplus.
In the latter case, money is created. It does not matter whether the central bank sterilizes the bank reserves that it supplied to the money market and prevents the interest rate change – money will be created anyway (although sterilization may prevent further money creation through credit extension). Our empirical analysis shows that for emerging markets the type (2) adjustment is more common than type (1). Therefore, the accumulation of foreign reserves is likely to create money even when sterilized (i.e. it does not lead to lower money market interest rates).
Keywords: money supply, credit, foreign exchange reserves, emerging markets
JEL Classification: E51, E58, F31, G21
Suggested Citation: Suggested Citation