Capital Flows, Measures and Effectiveness of Monetary Sterilization Policies in the Selected Emerging Market Economies

Abstract

The aim of our study is to investigate the scope and effectiveness of sterilization measures against different types of foreign capital inflows for 13 Emerging Market Economies (EMEs) over the period 2005Q1-2021Q4 and the extent to which such measures differ across countries and periods. In this framework, the question of the extent to which the extent of sterilization measures implemented by the EMEs to offset the macroeconomic effects of domestic monetary expansion resulting from foreign exchange intervention varies across countries and periods is investigated using the Instrumental Variables GMM technique. Moreover, the extent to which the effectiveness of sterilization policy differs across types of capital flows is investigated using quantile regression analysis. The findings of the research, the sterilization coefficients calculated for each EMEs and the panel analysis findings for the whole sample reveal the existence of partial sterilization in general. These results suggest that full sterilization is not implemented to reduce the long-run economic costs and to support domestic economic stability. On the other hand, quantile regression analysis reveals that sterilization measures are particularly effective against short-term private capital inflows. With these measures, it would be possible to limit the effects of different types of capital inflows and make the economy more stable.

Keywords

• International private capital flows
• Monetary policy
• Sterilization coefficient
• International reserves

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