Capital Inflows, Sterilization, and Commercial Bank Speculation: The Case of the Czech Republic in the Mid-1990's

November 1, 2004

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Format: Chicago

Jakob E Christensen. Capital Inflows, Sterilization, and Commercial Bank Speculation: The Case of the Czech Republic in the Mid-1990's, (USA: International Monetary Fund, 2004) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper analyzes the relationship between large-scale capital inflows and sterilization efforts in the Czech Republic during 1993–96 using a vector autoregression (VAR) model, which consists of domestic credit, foreign reserves, and domestic and foreign interest rates. The analysis finds that despite initial success in sterilizing capital inflows, this strategy proved increasingly costly and ultimately unsustainable as domestic interest rates attracted more capital inflows. The commercial banks exploited a profitable sterilization game, whereby they borrowed cheaply abroad and invested the funds domestically in high-yielding sterilization bonds.

Subject: Balance of payments, Capital inflows, Central banks, Conventional peg, Domestic credit, Foreign exchange, International reserves, Money, Sterilization

Keywords: Capital inflows, Conventional peg, Czech Republic, Domestic credit, Domestic interest rates, Eastern Europe, Exchange rate, Exchange rate policy, Interest rate development, Interest rate equation, Interest rate relationship, International reserves, Sterilization, Sterilization bond, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/218
Stock No:

WPIEA2182004
ISBN:

9781451875171
ISSN:

1018-5941

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