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Discussion Paper No. 13/01

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

**Michael Bleaney and Sharmila Devadas February 2013
**

____________________________________________________

2013 DP 13/01

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

Michael Bleaney* and Sharmila Devadas¶,# *School of Economics, University of Nottingham

¶

Central Bank of Malaysia

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. This pattern 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.

Keywords: JEL No.:

foreign exchange intervention, money, sterilisation, emerging markets E51, E52, F31, F33

#

This paper draws on two chapters of Sharmila Devadas’ PhD thesis at the University of Nottingham. The views expressed in this paper, unless otherwise indicated, are those of the authors, and do not in any manner reflect the position of the Central Bank of Malaysia.

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1.

Introduction

In the absence of full sterilisation of domestic money from inflows and outflows across the exchanges, foreign exchange intervention has consequences for domestic monetary conditions. Unless the domestic currency paid out by the central bank in buying up foreign exchange is mopped up by sales of other assets, the money supply will increase. These issues have become topical in recent years as emerging market countries, which typically manage their exchange rates to a considerable degree, have accumulated foreign exchange reserves (Aizenman and Glick, 2009). In the absence of full sterilisation, there is a danger that any advantages in export competitiveness gained by managing the nominal exchange rate could be eroded through higher inflation. Previous empirical estimates such as those of Aizenman and Glick (2009) and Lavigne (2008) have suggested a high degree of sterilisation, which would imply that this is not a problem in practice. There is, however, an important caveat here: these studies have focused almost exclusively on reserve money. This focus on reserve money stands in sharp contrast to the recent empirical literature emphasising the role of money in the macroeconomy, which stresses broad rather than narrow money (Assenmacher-Wesche and Gerlach, 2007; Bridges and Thomas, 2012; Gerlach, 2004; Ireland, 2004; Leeper and Roush, 2003). These papers demonstrate a longrun relationship between broad money and prices. The theoretical importance of money is discussed by Nelson (2008). This work suggests that it is important to investigate whether foreign exchange inflows affect broader measures of the money stock, and this is the main contribution of our paper. We find that, unlike reserve money, broad money is to a

significant degree not sterilised against foreign exchange intervention, particularly in the longer run. The failure to sterilise broad money in the longer run may explain why Cardarelli et al. (2009, pp. 30-1), in their cross-country study of large net private capital inflows,

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as in Aizenman and Glick (2009). 2.. reflecting factors such as the growth in personal incomes. and is not confined to those with particular balance-of-payments positions or other characteristics. there exist only a few recent studies that cover a group of countries that cut across regions. especially when these inflows have persisted for a longer time. Empirical results are presented in Section Four. We find that the accumulation of foreign exchange reserves feeds through significantly to broad money in the long run.” Our estimates of sterilisation derive from a regression-based approach that includes controls for demand factors. The rest of this paper is organised as follows. (2009) and Lavigne (2008). 2011. Some part of monetary growth is demand-driven. 2010). and it is important to control for these effects. In Asia. Section Three discusses the theoretical framework and choice of econometric methodology. Cardarelli et al. the effect of reserve accumulation on broad money growth has fallen since the 1990s. while the second and third encompass 52 and 35 3 . Previous research is surveyed in Section Two.g. and Section Five concludes.conclude that “a policy of resistance to nominal appreciation has not generally been successful in preventing real appreciation. Ouyang et al. of which six are Asian economies and three are Latin American economies. This pattern is fairly consistent across countries. Ouyang and Rajan. Literature Review There have been various single-country studies of the effects of intervention on reserve money in emerging market economies either as the focal point or as a subcomponent of issues related to capital flows and reserve accumulation (e. However. The first covers nine countries. and has often been followed by a sharper reversal of capital inflows.

Another limitation of existing research is that sometimes only current-quarter or even current-month effects are investigated. The estimated sterilisation ratios exceed 0.countries respectively. They estimate rolling 40-quarter regressions over the period 1994-2006.6 in the average country. They estimate current-quarter sterilisation rates of close to 100%.8 in most cases. which is potentially more important than reserve money. They do this for both reserve money and broad money. In contrast. namely reserve requirements. Neither study considers how differences in countries’ monetary policy frameworks and choice of instruments. Cardarelli et al. He takes into account the effect of reserve requirements. essentially dividing the cumulative change in currency in circulation over the relevant years by the cumulative change in net foreign assets (ΔNFA). with no particular time trend since 1991. Lavigne (2008) focuses on periods of sizeable accumulation of foreign exchange reserves in East Asia from 1990 to 1996 and from 2000 to 2006. there is a dearth of econometric analysis of the effects of foreign exchange intervention on broad money growth. may have affected their estimation results. but uses straightforward ratios. particularly in the later years. and allow for real GDP and inflation as control variables. arguably the effects on reserve money are of significance mainly because they may feed through to broad money. The cross-country averages in their Figure 8 indicate current-month sterilisation rates of base money of about 0. Methods differ across the three with the latter two adopting comparatively simple approaches to analysis. Aizenman and Glick (2009) adopt a static multivariate regression specification based on a simple version of the monetary approach to the balance of payments. (2009) estimate sterilisation rates separately for each country in each calendar year. but focus on the former. When countries persistently 4 . by a simple bivariate regression on the twelve monthly observations.

Our approach allows us to disentangle short-run and long-run effects of intervention. with particular attention to intervention effects on broad money growth. We also investigate differences in monetary policy frameworks across countries and conduct tests of possible country characteristics that may account for variations in individual country results. for instance by open market operations. Our contribution is to provide a detailed analysis for a reasonably large and diverse group of 28 countries. the effect of changes in net foreign assets depends also on what is happening to the money multiplier (m = BM/RM). 3. For broad money. Δ where Δ Δ (1) Δ Δ during time t = the change in net foreign assets of the central bank during time t Sterilisation involves insulating reserve money from changes in NFA.accumulate foreign exchange reserves. Theoretical Framework and Econometric Methodology The conceptual framework for analysing the effects of intervention begins with the following identities for the determinants of reserve money (RM) and broad money (BM). it is necessary to consider longer-run effects extending beyond the current month or quarter. Δ Δ Δ ) Δ (2) 5 .

as in Aizenman and Glick (2009). Dominguez (2012) uses data on a component of the balance of payments statistics – the change in the US dollar value of reserve assets – as a measure of intervention. for example with the shift to Standardised Reporting Forms. Thus the equation that we estimate for each country is of the form BMt = a + bNFAt +c.Zt + ut (3) where the vector Z consists of a set of control variables that are discussed in detail later. Moreover. Net foreign assets are equal to gross foreign assets minus gross foreign liabilities. Gross foreign assets consist of foreign exchange reserves plus non-currency items such as gold stocks and Special Drawing Rights (SDRs). recorded gross assets are occasionally smaller than foreign exchange reserves. and u is a random error.93). which we believe to be a more reliable series. Some portion of the growth of the money supply is demand-driven. The sterilization coefficient for country j is estimated as (1 – bj). To make sure that our estimates of sterilisation are not distorted by this effect. for example. The gross assets and liabilities series are not always complete and may have been subject to changes in definition. alteration of banks’ reserve requirements) or because of exogenous factors. by growth in nominal incomes. b and the vector c are parameters to be estimated.g. we add controls for demand factors. which implies that non-currency assets are implausibly negative. 6 .The money multiplier can change through policy actions (e. a. but closely correlated with them (the median correlation coefficient across the 28 countries in our data set is 0. At the second stage we investigate whether the set of country estimates (1 – bj) is correlated with country characteristics such as the current account balance. These figures are less complete than foreign exchange reserve data. In this paper we proxy changes in net foreign assets by changes in foreign exchange reserves.

(4) : national Column (1) of Table 1 shows that the correlation between this measure of NFA and an unadjusted measure that is simply based on the change in the domestic-currency value of 1 Source: http://www. aggregated over the whole world. any change in this amount is assumed to represent a genuine flow. and this portion. known as allocated reserves in the database. the currency composition is only known for a portion of reserves belonging to a segment of countries.imf. we assume that foreign exchange reserves of each country consist 100% of US dollar assets. has dwindled over time.org/external/np/sta/cofer/eng/index. Accurate estimation of the valuation effects requires full information on the composition of each country’s foreign exchange reserves. This ignores the component arising from interest payments on foreign securities. but to a decreasing extent – USD assets represented approximately 60% of reserves in 2010 compared with 75% over 1995-1998.a. This flow is translated into national currency at the average exchange rate prevailing during that period ( currency units per US dollar). The IMF’s COFER database1 indicates that. this should make little difference to our results. US dollar (USD) assets dominate reserves. which is very much lacking. globally. these valuation effects do not correspond to any actual flow across the exchanges. However. Since the data source gives reserves valued in US dollars.htm 7 .Foreign currency reserves consist mostly of securities denominated in foreign currencies. In the absence of further information. Since interest payments are a very smooth series. which Dominguez (2012) estimates to be about 4% p. The domestic-currency value of net foreign assets can therefore vary because of valuation effects of a given stock.

both adjusted for exchange rate revaluation effects ( and respectively).reserves over the period is sometimes quite low. with additional foreign assets and the netting off of foreign liabilities in the latter. Low correlations would primarily reflect the difference in components between the two measures. however. Column (2) of Table 1 contains the correlation coefficients between the change in the national currency value of foreign exchange reserves and the change in the national currency value of net foreign assets.75. with 20 countries exhibiting a correlation of more than 0. which we attribute to possible misclassification or reporting errors in the NFA series. There are notably low correlations for Japan and Canada. since in the case of both countries FXR exceeds the gross foreign asset component of NFA several times over. particularly for countries that have had substantial exchange rate movements against the US dollar. 8 . The correlations are. fairly high across countries.

97 0. (i)1999q1-2010q2.91 0. (h)1997m1-2010m6.68 0.63 0.93 0. (g)Annual data. (f)1993q2-2010q2.69 0.84 0. and those in (3) are based on quarterly data over 1990q1-2010q2: (a)1990m2-2010m6. (o)1996m1-2010m6.93 0. (2) The adjusted change in the national currency value of net foreign assets which excludes exchange rate revaluation changes ( ) is equal to .98 0. (k)1990m1-2010m5.96 0.98(p) 0.80(m) 0. (b)1991q1-2010q2.00(h) 0.81 0. the correlation coefficients in (1) and (2) are based on monthly data over 1990m1-2010m6.96 0.79 0.66 0.Table 1.92(d) 0.29 0.76 0. The unadjusted change in the national currency value of foreign exchange reserves which includes exchange rate revaluation changes ( ) is equal to .98 0. Unless otherwise indicated below.93 0.88 0.67 0.87 0.99(o) 0.37 0.83 0.92 (1) The adjusted change in the national currency value of foreign exchange reserves which excludes exchange rate revaluation changes ( ) is equal to .82 0.72 0.85 0.93 0. (n)2000q1-2010q2. (c)Annual data.12 0.70(q) 0.85 0. (j)2000m1-2010m6.95(b) 0.99 0. 1990-2009.86 0.58 0.33 0. (l)1999q1-2010q2.02 0.89 0.92 0. 1990-2009.36 0.99(c) 0.96 0.93(n) 0.84 1. (d)1996q1-2010q2.74 0.00 0.81 0.98 0.95(l) 0. (3) is the change in reserve assets in USD taken from the balance of payments account and excludes exchange rate revaluation effects. (q)1995q1-2010q2.81 0.57 0.16 0.94 0.49 0.64 0. (e)1993m22010m6.37(e) 0.95(i) 0.75 0.78(f) 0.94 0.81 0.48 0. Correlation between Different Measures of Foreign Exchange Intervention Correlation Coefficient (1) (2) and 1990m1-2010m6 (3) and 1990q1-2010q2 Country and Argentina Australia Brazil Canada Chile China Colombia Czech Rep Denmark Hong Kong Hungary India Indonesia Israel Japan Korea Malaysia Mexico New Zealand Norway Peru Philippines Poland Russia Singapore South Africa Thailand Turkey 0.90 1.95 0.89 0.74 0.78 0.00(k) 0. 9 .91(e) 0.58(o) 0.69 0.71 0.79(a) 0. (p)1996q1-2010q2. (m)1990m1-2010m4.76(j) 0.98 0.71(h) 0.88 0.92 0.87 0.

from the exchange rate revaluation effects for which we have not made an adjustment. namely monetary gold. The following is the basic model for quarterly broad money growth: 10 . The sample is shorter for some countries because of the lack of availability of long time series data for certain variables. Low correlations can arise from differences in components. and importantly. if a substantial portion of reserves are held in assets denominated in foreign currency other than the USD. however. We find. Special Drawing Rights (SDRs) and the reserve position with the IMF. The two exceptions are Norway and Singapore. The correlation coefficients serve as a check on the accuracy of the proxy for intervention that we have used. Baseline Model Specification Individual country estimations are based on quarterly observations over the sample period 1990q1 to 2010q2.In column (3) of Table 1. we present the correlation coefficients between the change in the USD value of foreign exchange reserves and the USD value of reserve assets flow from the balance of payments used by Dominguez (2012) ( and respectively). The latter includes the change in the stock of non-currency reserves. with 26 countries displaying a coefficient of more than 0. that the correlation coefficients are relatively high across the countries.75.

inflation and the return on holding foreign securities. a general-tospecific modelling procedure was adopted. in real terms. bonds and US Treasury Bills.(5) where BM is real broad money. some of which are inevitably insignificant. A similar equation is estimated for reserve money except that iB is omitted. including the dependent variable. variables is given in Appendix Table A1. iB and iUS are respectively the interest rates on money. Because of the lags in equation (5). and the equation re-estimated. The short-run sterilisation coefficient is . Only the contemporaneous effect of the change in foreign 11 . Y is the log of real GDP. relative interest rates. Four lags of each variable. the procedure generates both a short-run (currentquarter) and a long-run estimate of the sterilisation coefficient for each country (1 – bj). are included. FXR is the adjusted measure of foreign exchange inflows. The control variables reflect standard money demand specifications: income. REER is the real effective exchange rate and Inf is the consumer price inflation rate. and the long-run coefficient is: The precise definition of (6) Equation (5) contains a large number of regressors. iM. At each step the least significant variable was removed. until all the remaining regresssors were statistically significant at the 10% level. To obtain a more parsimonious regression for each country.

differences across countries in the range of financial assets considered as part of broad money. Although the initial unrestricted model is identical. therefore be. resulting in a loss of information (Davidson and MacKinnon (1993) highlight the problem of biased coefficients arising from the use of linear filters when specifications have lags of the dependent variable). National definitions of broad money may include repurchase agreements. commercial paper issued by depository corporations. these parsimonious specifications differ across countries. 2000). 2000). Broad money is not defined identically across countries. a set of seasonal dummy variables is included in the estimating equations. consisting of currency in circulation and banking institutions’ reserve balances. and depending on their liquidity. A comparison of results from the parsimonious and the unrestricted regressions shows that the main effect of eliminating insignificant regressors was to reduce the standard errors of the sterilisation coefficients rather than to change the point estimate. Nevertheless. 12 . Non-transferable deposits and securities other than shares account for the predominant portion of broad money components other than currency and demand deposits (IMF. None of the variables have been seasonally adjusted. and non-residents. there may be some exceptions with regard to the classification of government units other than the central government. shares in money market funds. In general. Reserve money is defined as the narrowest measure in each country. This is to avoid the risk that seasonal adjustment affects the dynamics of the equations being estimated.exchange reserves was retained even if insignificant. There will. bankers’ acceptances. which excludes the central government and non-residents from the money-holding sectors2. the broad money variable used here reflects the broadest national definition of money that is available. To account for seasonality. negotiable certificates of deposits. for each country. 2 The principal money-holding sectors are the same in almost all countries (IMF.

The requirement for quarterly data restricts the sample in some cases. primarily in the context of non-normality in the residuals. we group these countries with the emerging market economies. The sample consists of 22 emerging market economies3 that are listed in the Appendix.In instances where serial correlation and/or heteroscedasticity had been detected either in the unrestricted model or in the final parsimonious model. have been removed for some countries with the use of impulse dummy variables. 4 and 8 using the F-test for joint significance of lagged residuals and the Breusch-Godfrey LM test. The robust standard errors were derived according to either the Newey-West HAC or White Consistent Covariances method. Denmark. Korea. New Zealand and Norway. 3 The IMF’s World Economic Outlook (WEO) database classifies the Czech Republic. In our empirical analysis. Serial correlation was tested for at lags 2. Singapore and Taiwan as advanced economies although some of the IMF’s research studies classify these econo mies as emerging markets. The effects of outliers. 4. Hong Kong. it has accumulated a large stock of foreign exchange reserves in recent years. Israel. robust standard errors were used from the beginning of estimation. Canada. The focus is on these countries because of their tendency to intervene more in the foreign exchange market than the typical advanced countries. We have also included Japan because. and for developed economies. Empirical Results 4. To these we have added a number of smaller advanced countries for comparison purposes: Australia. Table 2 shows the average short-run and long-run estimated coefficients of the change in foreign exchange reserves for emerging market economies by region. like many other East Asian countries.1 Sterilisation of Reserve Money We start by estimating the parsimonious versions of equation (5) for reserve money. and also in regard to other diagnostic test results. 13 .

095 unit increase in the long run. Thus. while for the long-run coefficients.095 in the long-run respectively. Since these results are fairly similar to those of Aizenman and Glick (2009).185 respectively. and negative in value for eight countries. The results indicate that the effect of foreign exchange intervention on reserve money growth is on average low. the short-run and long-run coefficients are in the range of 0. Nevertheless. However. On closer inspection.133 and 0. we now turn our attention to broad money. t-statistics are reported. a one unit increase in foreign exchange reserves only leads to a 0. For the short-run coefficients. Fstatistics are reported – both statistics are in brackets. the negative coefficients tend to be of small economic significance.000 – 0. There are two columns of results in Table 2. The average coefficients for the sample of 28 countries are 0. In effect.069 in the short-run and 0. 14 .200 for about half of the countries (15 and 16 respectively). which suggests substantial dispersion across countries.069 unit increase in the change in reserve money in the short run and a 0. the corresponding standard deviations across the sample group are 0. even in the long run.The full array of country-by-country sterilisation coefficients is shown in Appendix Table A2. Column (i) consists of the short-run coefficient on while column (ii) lists the corresponding long-run coefficient. foreign exchange flows are more than 90% sterilised. even if they are statistically significant.

947) 0.067 (1.466) 0. = 0.095*** (20.349) 0.536) for the whole sample. Regressors are removed one at a time in a unidirectional backwards manner based on the lowest t-statistic each time.106 (1.104*** (3. which include only statistically significant variables at the minimum 10% significance level. ***: significant at 1%.170) 0. The results are based on restricted regressions.Group Averages The group average effect of on Group (i) Contemporaneous (ii) Long-run multiplier Asia 0. Column (ii) reports the simple average of the long-run multiplier and the corresponding average F-statistic. for which the standard errors are particularly small. The F-statistic is for the test.578) 0.039*** (9.133 0.251) 0.111*** (55. 15 .185 Latin America Other Emerging Markets Developed Economies TOTAL Sample standard deviation Column (i) reports the simple average of the contemporaneous effect and the corresponding average t-statistic.113) 0.050 (1.Table 2. the average long-run effects are 0.069 (1. **: significant at 5%.and F-statistics.430) 0. *: significant at 10%.900) 0. Excluding Peru.048 (0.180) for the Latin America sub-group and 0. The Effects of a Change in Foreign Reserves on Reserve Money Growth .249) 0.144*** (20.088*** (11.107*** (14. This applies to all regressors except the contemporaneous effect of which is not removed in the general to specific modelling process. with the F-statistics taking the sign of the coefficient. For both t.

As in Table 2.47% in Asia. while column (ii) lists the corresponding long-run coefficient. 0. and here the results are markedly different. the results refer to a parsimonious version of equation (5) that was the outcome of a general-to-specific modelling approach. The results shown in Table 3 indicate that the effect of intervention on broad money growth is. The average coefficients for the sample of 28 countries are 0. For countries with persistent inflows. Thus there is a consistent pattern across all countries. and these numbers average out at 0.079 only for Latin America.50% in developed economies. using equation (5). the longer-run effects should be of more concern. A foreign exchange inflow that represents 1% of the broad money stock is estimated to increase broad money after four quarters by 0. column (i) consists of the short-run coefficient on foreign exchange flows.27% in other emerging markets.4.34% in Latin America. indicating only 60% sterilisation of broad money in the long run. and 0. we present the group averages of the short-run and long-run intervention effects on broad money growth. 0. as shown by the average t-statistic. As in the case of reserve money. compared with the 90% for reserve money shown in Table 2.396 in the long run respectively. on average. 16 .40% for the typical country. but noticeably higher in the long run.2 Sterilisation of Broad Money In Table 3.079 in the short run and 0. relatively low in the short run. Individual country results are detailed in Appendix Table A3. The short-run effects are not significant in the typical country. and are rather higher than the average of 0.

107) 0. ***: significant at 1%.466** (4. The results are based on restricted regressions.079 (1.and F-statistics. which include only statistically significant variables at the minimum 10% significance level.069 (-0.077) 0.829) 0. The Effects of a Change in Foreign Reserves on Broad Money Growth . For both t. The F-statistic is for the test.396*** (7.265** (4. This applies to all regressors except the contemporaneous effect of which is not removed in the general to specific modelling process. Regressors are removed one at a time in a unidirectional backwards manner based on the lowest t-statistic each time. with the F-statistics taking the sign of the coefficient. **: significant at 5%.337*** (17. Column (ii) reports the simple average of the long-run multiplier and the corresponding average F-statistic.239*** (3.Group Averages The group average effect of on Group (i) Contemporaneous (ii) Long-run multiplier Asia 0.249 0.669 Latin America Other Emerging Markets Developed Economies TOTAL Sample standard deviation Column (i) reports the simple average of the contemporaneous effect and the corresponding average t-statistic.Table 3.855) 0. *: significant at 10%.715) 0.374) -0.080) 0.096 (1.668) 0. 17 .065 (0. = 0.503** (7.187) 0.984) 0.

Furthermore. With regard to the long-run coefficients. which suggests substantial dispersion. Furthermore. we have compared the long-run coefficients for a subset of countries4 analysed by Takagi (1999). particularly with regard to the long-run coefficients. 18 . but they claim to find a high degree of sterilisation. the short-run coefficients are in the range of 0. Philippines and Thailand. on an individual-country basis. it would appear that the methodology and data used also matter. Takagi’s estimated coefficients are based on static multivariate regressions using quarterly data over the period 1987q1-1997q2. The degree of dispersion is larger than for reserve money growth. where there has been work done.009.750.249 and 0. comparisons are complicated by differences in country coverage. However. Nevertheless. methodology and sample period.000 – 0. At an average of 0.200-0. seventeen countries fall in the range 0. as for 4 The countries are Indonesia. whilst five countries display negative values. With regard to the former. suggestin g the importance of variations in the coefficients over time. Korea.The corresponding standard deviations across the sample group of 28 countries are 0. in Takagi’s case. (2009) do not report the results for the effects of a change in foreign assets on changes in broad money.250 for fourteen countries and negative in value for 10 countries.428 for these countries. there is hardly any statistical significance of the coefficients.669 respectively. Malaysia. our result is markedly in contrast to that of Takagi’s at -0. On closer inspection. Cardarelli et al. It is difficult to make comparisons with the results of previous empirical work. not least because of the limited amount of existing research that has quantified the effects of intervention on broad money growth. our dynamic model specification allows for both the contemporaneous and indirect effects of intervention to be taken into account. except in the case of the Philippines. One obvious difference between our study and Takagi’s is the sample period under consideration.

their results are consistent with our findings. income levels (high income versus middle income) and monetary policy frameworks (inflation-targeting versus non-inflation-targeting). Thus we are left with the conclusion that no obvious features explain the degree to which broad money growth is sterilised. based on the results of ANOVA F-tests for differences in means5. (2) the nature of intervention (volatility. we assess if there exist linear relationships between intervention effects on broad money growth and specific country characteristics. 5 The distributions for the short-run and long-run coefficients were pre-tested for non-normality and heterogeneous variances across subgroups based on the subgroup classifications. (3) exchange rate flexibility. the number of surplus periods. based on monthly data. and (4) the nature of the current and capital accounts in terms of openness and net balances.3 Estimated Sterilisation Coefficients and Country Characteristics Can the pattern of estimated sterilisation coefficients of broad money shown in Appendix Table A3 be explained? This is the issue that we address in this sub-section. Since they estimate only a short-run coefficient. 4. and reserve accumulation). and use a series of bivariate regressions to investigate whether these coefficients vary systematically with (1) income levels. none of these features are close to statistical significance. we test for differences among the countries in our sample by splitting them into clearly delineated groups based on regions. We did not find any evidence of non-normality. as the dependent variable. Initially. shown in Appendix Table A3. current account and capital account balances (surpluses versus deficits). We treat the estimated coefficients for long-run intervention effects in the equation for each country. Table 4 shows that.reserve money. In Table 5. As in Table 4. the results in Table 5 are resoundingly negative: in every case the tstatistic is very low and the adjusted R-squared negative. 19 .

265** 0.031 0. **significant at the 5% level. A country is recorded as a surplus country if the proportion exceeds 0.120* 0.4929 0.1681 0.6645 0.082* 0.4783 3. 0. Mean Equality Tests for Intervention Effects on Broad Money Growth Effect of ΔFXR on ΔBM Short-run Coefficient Long-run Coefficient Group Mean Group Mean Mean Equality Mean Equality F-test F-test (p-value) (p-value) 0. The mean equality test is the single-factor ANOVA F-test or Welch F-test for unequal variances.Table 4.9693 0.5. Countries are classified as either high or middle income based on the World Bank income classification scheme.500*** 0.3510 0. Income level is measured by the average of GDP per capita based on purchasing power parity over the regression sample period for each country.307*** 0.306** 0.4777 5.6519 CA and KA surpluses are measured based on the number of surplus years as a proportion of the total number of years corresponding to the regression sample period for each country.6640 4.503** 0.432*** 0. Inflation-targeting countries are countries that have adopted the inflation-targeting framework at some point during our sample period.096 0.327*** 0.337*** 0. 0. 0.239*** -0.114** 0. with the F-statistics taking the sign of the coefficient. *significant at the 10% level.109** 0.297** 0.065 0. These do not indicate statistically significant differences across the subgroups.078 0.9143 1.and F-statistics.064 0. ***significant at the 1% level.481*** 0. Short-run and long-run average statistical significance of the coefficients for subgroups in the “Group Mean” columns are based on the corresponding simple average of t.069 0. Groups Region Asia Latin America Other EMEs Developed Economies Current Account (CA) Balance CA surplus CA deficit Capital Account (KA) Balance KA surplus KA deficit Income Level High income Middle income Monetary Policy Framework Inflation-targeting Non-inflation-targeting 2. 20 .429** 0.048 0.466** 0. 0.

161 0.246 0.04 -0.281 0. -0.04 -0.03 -0. 21 .209 0.223 -0. 4.141 -0. Bivariate Regressions between Long-run Coefficients of Intervention Effects and Country Characteristics Country Characteristic (Regressor in bivariate regression) 1.04 -0. 8.042 -0.599 0.04 14. 13.577 0.04 -0.153 0.897 0. 12.135 -0.085 -0.04 -0.02 -0.043 0. 10.03 -0. 15.02 -0. *: significant at 10%.01 -0.417 -0.04 -0.098 -0.076 -0.526 0. All regressions include a constant which is not shown for brevity.428 -0. 11. 9.612 0.158 -0.081 0.015 -0.477 -0. ***: significant at 1%. 7. 5.799 -0.01 The dependent variable is the set of estimated long-run multipliers for each country listed in Appendix Table A3.502 0. **: significant at 5%.051 -0. 3.03 -0.089 0.364 0.601 0. 2. GDP per capita (Y/c) Intervention volatility (FXIV) Surplus periods (FXIS) Reserve accumulation (RA) Exchange rate flexibility (ERF) Current account openness (CAO) Capital account openness (KAO) Current account balance (CAB) Current account surplus years (CAS) Capital account balance (KAB) Capital account surplus years (KAS) Net direct and portfolio investment balance (DIPIB) Net direct and portfolio investment balance surplus years (DIPIS) Net other investment balance (OIB) Net other investment balance surplus years (OIS) Dependent Variable: Long-run Effect of ΔFXR on ΔBM Coefficient t-statistic Adjusted R2 -2. 6. For t-statistics.Table 5.04 -0.

Philippines. 8) is fairly stable over time at around 0. the average estimate in Cardarelli et al. comparing 2000-06 with 1990-96. is as follows (but. Singapore and Thailand. in its general form. rather than repeat the whole general-tospecific procedure. To estimate whether the degree of sterilisation of broad money has changed between the 1990s and the 2000s. suggest a marked increase in the sterilisation coefficient from low levels in China and India. Arguably persistent foreign exchange reserve accumulation since 2000 has made sterilisation a much more important issue in recent years. Korea. Fig. Malaysia. The new estimating equation. and from 2000q1 to 2010q2. Thailand). where the estimated sterilisation coefficient was already high in the earlier period.4 Comparing the 1990s and the 2000s The 40-quarter rolling regressions shown in Aizenman and Glick (2009. Korea. all lagged variables.4. d(00q1-10q2).6. Fig. all variables (contemporaneous and lagged values) and the intercept term are individually interacted with a dummy variable. but to preserve degrees of freedom the coefficients of the other variables are constrained to be unchanged over the two sub-samples. we split the sample into two periods: up to 1999q4. 2) suggest that the degree of sterilisation of reserve money has increased over time in a number of Asian countries (China. Malaysia. but little change in Indonesia. reaching close to 100% by the end of their sample period (2006). Appendix B). that takes the value of 1 from 2000q12010q2 and 0 otherwise. (2009. we just added the new variables into the chosen parsimonious regression for each country): 22 . The seasonal factors. Lavigne’s estimates (2008. On the other hand.

28 for the 1990s and 0. The long- (9) : 2000q1-2010q2 (10) Table 6 summarizes the results by region (the results for individual countries are shown in Appendix Table A4).14 for the 2000s.22. the intervention effects are lower in the 2000q1-2010q2 period.43 to 0. The results indicate that. for Latin America the figures are 0. and for the other emerging markets -0.24 for the 2000s. 23 . For the average Asian country the long-run intervention coefficient for broad money has fallen from 0. indicating a significantly higher degree of sterilisation.03 for the 1990s and 0.89 to 0. for Asian countries in particular.28.(8) The short-run coefficients on intervention effects are now beginning of the sample to 1999q4 and ( run coefficients are now: : sample start – 1999q4 for the period from the ) for the period 2000q1-2000q2. For the whole sample the average has fallen from 0.

054) 0.963) 0. and all variables (contemporaneous and lagged values) are individually interacted with a dummy variable that takes the value of 1 from 2000q1-2010q2 and 0 otherwise.995) -0.247 (1. ***: significant at 1%.247) 0.140 (0.282) 0. Columns three and four report the average long-run effects and corresponding average F-statistics.708) 2000q1-2010q2 0. seasonal factors. with the F-statistics taking the sign of the coefficient.434 (2.894* (2.073 (1. See equation (8).542) 0.942) 0. *: significant at 10%. all lagged variables.311 (0.238** (3. For both t.459) Country Long-run Multiplier 2000q1-2010q2 0.029 (0.276 (1.and F-statistics in brackets. the constant. 24 .099) To split the periods.692) Asia Latin America Other Emerging Market Economies All Emerging Market Economies Sample start1999q4 0.018 (0.120) 0.319 (1.218** (3.and F-statistics.855) 0. Columns one and two report the respective group average contemporaneous effect for the two periods and the corresponding average t.903) 0. The Effects of a Change in Foreign Reserves on Broad Money Growth – Group Averages for Sub-periods The estimated effect of on Contemporaneous Sample start1999q4 0.019 (0.222 (1.284* (2.086) 0.220) 0.356 (-0. **: significant at 5%.Table 6.

Conclusions In this paper.5. Empirical work in this regard has been relatively scarce. Although Asian countries seem to have insulated broad money from the effects of foreign exchange intervention more effectively since 2000 than previously. with emphasis mainly on reserve money sterilisation. including the structure of current and capital account balances. which still represents a substantial contribution to monetary growth. We investigated in some detail whether the estimated degree of long-run sterilisation of broad money varied systematically with country characteristics. For reserve money our results confirmed those of others: there is a high degree of sterilisation in both the short and the long run. given the quantity of reserves accumulated. 25 . Our findings imply that countries are substantially less successful at sterilising foreign exchange inflows than previous research has suggested. with negative results. This allowed us to consider the short-run and long-run effects of intervention on money growth separately. our point estimate for this period is that over 20% of foreign exchange reserve accumulation finds its way into the broad money stock. compared with over 90% in the short run. and also to recognise heterogeneity across countries. Our empirical analysis was carried out using multivariate dynamic regressions for a sample of 28 countries. we set out to investigate the effects of real intervention on the growth of reserve money and broad money over the period 1990q1-2010q2. For broad money our results were rather different: in the long run it is only about 60% sterilised.

K. R. Japan. Nelson. Ilzetzki. Journal of European Economic Association. Vol.G. “Monetary and Financial Statistics Manual”. and Rajan. “Why Money Growth Determines Inflation in the Long Run: Answering the Woodford Critique”. E. and Thomas.S.S. 29.C. 1987-1997”. Vol. Journal of International Money and Finance. and Roush. Vol. Ouyang. Bank of Canada Discussion Paper. pages 777-801. “Sterilization.ac.uk/ilzetzki/data/ERA-Country_Chronologies_2011. pages 534-542. Bank of England Working Paper. A. Oxford: Oxford University Press. 40 (8). E. Cardarelli. Journal of Money. Discussion Paper No. K. Washington D. Economic Planning Agency. "Money's Role in the Monetary Business Cycle. R. 17(4). 36(6). “Foreign reserve management during the global financial crisis”.N. (2012). (2011) "Exchange Rate Arrangements Entering the 21st Century: Which Anchor Will Hold?" mimeo. Journal of International Money and Finance.: International Monetary Fund.. R. R. Vol. J. “The impact of QE on the UK economy – some supportive monetarist arithmetic”. August. J. (2003)..M.M... Costs and Risks”. and McKinnon.Y. J. Davidson. Takagi. Bridges. (2010). Estimation and Inference in Econometrics. Tokyo. K. “Reserve accumulation and monetary sterilization in Singapore and Taiwan”. R. pages 951-972. (2012). “Money at Low Frequencies”. (2009). Economic Policy 40. “Sterilization and the Capital Inflow Problem in East Asia.D.lse. (2007). S. No. IMF Working Paper 09/40. and Willett. (2004). Ouyang. (2008).pdf. Leeper. (2004). Reinhart. “The Two Pillars of the European Central Bank”.E. Lavigne. 31. Monetary Policy and Global Financial Integration”. pages 1217-1256. P. T. J. pages 2015-2031. 26 . Ireland. A." Journal of Money. pages 389439. Credit and Banking.S. 35. 86. and Ayhan Kose. M. Economic Research Institute. “China as a reserves sink: The evidence from offset and sterilization coefficients”. “Sterilized Intervention in Emerging Market Economies: Trends. Credit and Banking. pages 969-983. Dominguez. 442. and Glick. Vol. Applied Economics. (2009). “Capital Inflows: Macroeconomic Implications and Policy Responses”. “Putting M back in Monetary Policy”. S. Elekdag. R. S. C. Credit and Banking. 5(2-3). 43. (2011). (2008). Review of International Economics. March. and Rogoff.Y.References Aizenman. Rajan. E. (1999). 2017-2037. Assenmacher-Wesche. pp. December. Vol. Gerlach. Vol. International Monetary Fund (2000). pages 1791-1814. R. S. And Gerlach. Available via the Internet: http://personal. (1993). Vol. Journal of Money.

Interest rate on domestic government/corporate bill/bond rate expressed in percent per annum. The raw foreign exchange reserves (FXR) series is in USD (IFS code: . and Abeysinghe and Gulasekaran (2004). the CPI was used as a deflator. Data Source: IMF International Financial Statistics (IFS) (downloaded via ESDS International. University of Manchester. typically a time deposit rate which is expressed in percent per annum. national agencies. Interest rate on money.Appendix Table A1: General Explanatory Notes on Variables Variable Description Real broad money valued in national currency (NC) and deflated by the CPI. http://www. Where only currentprice data were available.DZF). The central bank’s real foreign exchange reserves valued in NC.1D. 27 .asp). Real base money valued in NC and deflated by the CPI. The real monthly change is derived as follows: ΔFXR (NC) = {(ΔFXR(USD) x } x 100 NC/USD Logarithm of gross domestic product (GDP) valued at constant prices (base years vary across countries).uk/international/doipages/imfifs. The annual inflation rate is calculated as the four-quarter change in the logarithm of the CPI: . US 3-month Treasury Bill rate expressed in percent per annum. Datastream.ac.esds. Logarithm of the real effective exchange rate.

928] 1990q3-2010q2 0.414] 0.088) 1998q1-2010q2 India Indonesia Korea Malaysia Philippines Singapore Thailand 0.345] Column (i) reports the contemporaneous effect and the corresponding t statistic.058* (3.074) 0. which include only statistically significant variables at the minimum 10% significance level.070* [2.073* [-1.009 [-0. Column (ii) reports the long-run multiplier and the corresponding F-statistic. The results are based on restricted regressions. The F-statistic is for the test.595) 0. Regressors are removed one at a time in a unidirectional backwards manner based on the lowest t-statistic each time. = 0.848] 1990q2-2010q2 -0.151** (4.447) 1991q1-2010q2 -0.209*** (4.088** (-2.Individual Country Results The effect of on (i) Contemporaneous Country (ii) Long-run multiplier Asia China 0.213** [2.019 [0. 28 .000 [0.013) 1991q1-2010q2 0. *: significant at 10%.221) 1999q1-2010q2 Hong Kong 0.645] 1991q2-2010q2 0. For both the t.777] 0.073* [3.242*** (44.Appendix Table A2: The Estimated Effects of a Change in Foreign Reserves (FXR) on Reserve Money Growth (RM) .003 (0. This applies to all regressors except the contemporaneous effect of which is not removed in the general to specific modelling process.086] 1996q2-2010q2 -0.266*** (4.391] -0.770] 1991q2-2010q2 -0.039** (2.071) -0.008) -0.038*** [38.030 [0. [Newey West]. using (Default). ***: significant at 1%.018* [1. **: significant at 5%. {White} standard errors.000] 0.and F-statistics.

021** [2.130*** [260.056*** [-2.486*** [61.800) 0.651] 1997q1-2010q2 Brazil 0.685) 1994q4-2010q2 -0.088*** [16.066 [1.876] 1991q1-2010q2 Chile Colombia Mexico Peru 0.187] 1995q2-2010q2 0.035* [1.079 [1.286] 0.033] -0.095* (1.040*** [7.589] 1995q2-2010q2 0.080 (0.237] 0.537] 29 .Continued The effect of on (i) Contemporaneous Country (ii) Long-run multiplier Latin America Argentina 0.137* [2.463] 0.739] 1991q2-2010q2 -0.

199 [0.239*** [16.246] 0.056] -0.055 [0.054 [1.277) 1991q2-2010q2 South Africa 0.164*** [14.154*** [80.065 (0.071 [1.008 [0.086** [-2.787] 1991q1-2010q2 0.870] 0.079 [0.140 [0.204** [5.091 (-1.040 [0.322] 30 .056 [1.038 (0.063) 1997q3-2010q2 Poland -0.437] Developed Economies Australia 0.Continued The effect of on (i) Contemporaneous Country (ii) Long-run multiplier Other Emerging Market Economies Czech Republic 0.431] 1991q1-2010q2 0.176) 1990q4-2010q2 Israel 0.107** [5.780*** (56.351] 1991q1-2010q2 Denmark Japan New Zealand Norway 0.055 (1.162*** [15.287] 1995q2-2010q2 Turkey -0.117) -0.707] 0.356] -0.209) 0.146] 0.004] 1996q1-2010q2 Hungary 0.027) 0.761] 1990q2-2010q2 0.533*** (7.002 [-0.897] 1990q4-2010q2 Canada -0.730] 0.088*** (8.582] 1990q4-2010q2 0.028 [-1.089] 1996q3-2010q2 Russia 0.198) 1997q2-2010q2 0.743) -0.037 (1.

**: significant at 5%.062) 1998q1-2010q2 0.263) 1991q1-2010q2 0.187* (1.285** [9.328** [7. This applies to all regressors except the contemporaneous effect of which is not removed in the general to specific modelling process. which include only statistically significant variables at the minimum 10% significance level.086) 1991q1-2010q2 0.141 [-0. Regressors are removed one at a time in a unidirectional backwards manner based on the lowest t-statistic each time. [Newey West].607] -0.497) 0. For both the t.and F-statistics.Individual Country Results The effect of on (i) Contemporaneous Country (ii) Long-run multiplier Asia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Thailand -0.612) 0.038 (-0.156*** (9.148 [-1. The F-statistic is for the test.Appendix Table A3: The Effects of a Change in Foreign Reserves (ΔFXR) on Broad Money Growth (ΔBM) .312 (1. {White} standard errors.405) 0.363** (5.170] 0.387) 1990q2-2010q2 0.029 (0.661** [5.748] 0. Column (ii) reports the long-run multiplier and the corresponding F-statistic.812) 0.081] 1990q4-2010q2 -1. 31 .810] 1991q2-2010q2 0.239) Column (i) reports the contemporaneous effect and the corresponding t-statistic.205 (0.550) 1997q3-2010q2 0. = 0. using (Default). *: significant at 10%.824) -0.197*** (3.093 [0.236 (1. The results are based on restricted regressions.912** (5.115] 1995q2-2010q2 0.166*** (2..826** (13. ***: significant at 1%.754) 1991q2-2010q2 2.

523*** [3.064 [-0.149 [1.346] 1995q1-2010q2 -0.136 (2.230] 1997q4-2010q2 Brazil 0.081 (-0.120 [0.653*** [75.744) 0.091 [-0.992 [1.233*** [-3.378) 0.192*** (3.107) 1996q3-2010q2 0.206** (3.538] 1997q2-2010q2 0.032) Other Emerging Market Economies Czech Republic -0.508] 0.187*** (3.069 (1.187* (-1.271*** [-3.934] 0.770] 1991q2-2010q2 -0.737] -0.904) 0.567*** [10.146 [0.769) 1991q2-2010q2 -0.723] 32 .Continued The effect of on (i) Contemporaneous Country (ii) Long-run multiplier Latin America Argentina 0.542) 1990q3-2010q2 Chile Colombia Mexico Peru 0.709] 1998q1-2010q2 -0.108) -0.323*** (15.406*** [8.162 (0.285) 1990q2-2010q2 -0.979) 1996q2-2010q2 Hungary Israel Poland Russia South Africa Turkey 0.388] 0.205*** [3.302) -0.656] 1994q4-2010q2 0.493] 1995q2-2010q2 0.048] 0.136 (1.597) 1995q2-2010q2 0.334] 0.735** (4.362*** (18.910** [11.

242 [1.425*** (7.862* (2.Continued The effect of on (i) Contemporaneous Country (ii) Long-run multiplier Developed Economies Australia 0.940) -0.423] 1991q2-2010q2 0.240*** [3.110) 1991q1-2010q2 0.845] 1990q2-2010q2 0.795] 0.376] 33 .951) 1991q2-2010q2 Canada 0.704*** [20.545* [3.004) 1.604* [-1.081 (0.062 (0.735] 0.222) 0.169] 1991q2-2010q2 -0.366 (1.399*** [7.639) 1990q4-2010q2 Denmark Japan New Zealand Norway 0.172 (0.

using (Default).095 (0.741] 0.255 [1.288) 0.441) 0.877*** [7.510** [2.567) 0.199 (0.280] 0.275] 0.096] 0.138 (1.383) 1. The Effects of a Change in Foreign Reserves on Broad Money Growth – Individual Country Results for Sub-periods The effect of on Contemporaneous Sample start1999q4 Asia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Thailand Latin America Argentina Brazil Chile Colombia Mexico Peru 0.369] -0.567] 0.982** [4.137 (0.423] -0.290 (2.604 (0. 34 . all lagged variables. [Newey West].033] -0.095] 0.443 (1.060*** [10.463) 2000q1-2010q2 Country Long-run Multiplier Sample start1999q4 2000q1-2010q2 To split the periods.110 (0.114 [0.356] 0.052 [2.and Fstatistics in brackets.331) 0. and all variables (contemporaneous and lagged values) are individually interacted with a dummy variable that takes the value of 1 from 2000q1-2010q2 and 0 otherwise.269 [2.102] 0.073 [0.141 (0.111 (1.283) 0.991** [4.532*** [10.041 [0.237) -0.110 (0.983 [1.072 (0.137) 0.410 (0.464** [4.477) 0.381) 1. seasonal factors.351) 0.417 (1.118) 0.162** (4.492) 0.011) 2.242** (-2.155 (0.194] 0.251] 0.202 [1.584] -0. ***: significant at 1%.858) -0.129* (2.830*** [3.231 [1.416** (4. Columns one and two report the respective contemporaneous effect for the two periods and the corresponding t.556) 0. Columns three and four report the long-run effects and corresponding F-statistics.190 [1.179** (5.794) -0.131 (1.575) 0.834] 0.412* (1.557] -0.647) 1.Appendix Table A4. the constant.052) 0.354] 0.202) 0.051* (3.036) 1.157*** [8.234*** (3.213 (1.041) 2.659] 0.165 (2.106) 0.720] 0. *: significant at 10%.046 (0.179 (0.259 [0.190** (5.131 (1.947) -0.062 [0.074 (0.348*** (13.385] -1.167 (0.302) 0.684 [2.307* (3.206** (5. {White} standard errors.399** [5.047) 0.085) 0.693) 0.331) 0.594) 0.156) 3.891 [0. **: significant at 5%.051] 0.987** (5.793) 0.716] 0.423] -0. For both t. See equation (8).and F-statistics.797] -0.042) 0.185) 0.

637) -0. For both t.920] -0. See equation (8). Columns three and four report the long-run effects and corresponding F-statistics.335*** (16.147] 0.376] -0.Continued The effect of on Contemporaneous 2000q1-2010q2 -0.122] 2000q1-2010q2 -0. all lagged variables.011] -0.and F-statistics. Columns one and two report the respective contemporaneous effect for the two periods and the corresponding t.063 [0.365 [1.089) -0. *: significant at 10%.321) -0.759] 0.429 Russia (-1.708 (2.976] 0.017 (0. and all variables (contemporaneous and lagged values) are individually interacted with a dummy variable that takes the value of 1 from 2000q1-2010q2 and 0 otherwise.142* Poland [1. the constant.044) -0.157 Israel [-1.349] -0.965) 0.418) -0.259) -0.110 [0.109*** [14.420] 1.924** [6.015 [0. using (Default). 35 .584* (3.087 (1.689 (1.229) 0.190] To split the periods.004] 1.402] -0. seasonal factors.008) -0. [Newey West]. **: significant at 5%.063 [0.165** (7.577** Czech Republic [2.191** Turkey [-2.415] Country Long-run Multiplier Sample start1999q4 1.581) -0.239 (2.757] -0.318** [6.435 South Africa (-1.281) 0.541*** [12.682 (1. {White} standard errors.and Fstatistics in brackets.253] Sample start1999q4 Other Emerging Market Economies 2.427** [4.066 [0.891] 0. ***: significant at 1%.737** [4.012 Hungary (-0.592) -0.

5.Appendix 5: Definitions of Country Characteristics 1. with larger numbers reflecting increased flexibility. (http://data. 6. Current account/Capital account balance (CAB/KAB): Average of the annual net position in the account scaled by the average annual nominal GDP for the years that corresponds to the regression sample period.org/about/country-classifications) 8.htm) 36 . (2011). Net direct and portfolio investment/other investment balance surplus years (DIPIS/OIS) are calculated in a similar manner.worldbank. A country is recorded as a surplus country in the respective account if CAS/KAS > 0. The total surplus quarters (FXIS) refers to the number of quarters with a positive increase in reserves as a proportion of the total number of quarters. 4.lse.5. Current account/Capital account openness (CAO/KAO): Average of the sum of the absolute value of annual inflows and outflows for each account respectively. 3. Intervention volatility (FXIV) is measured by the standard deviation of the monthly changes in foreign exchange reserves scaled by the average annual nominal GDP.uk/ilzetzki/IRRBack. Net direct and portfolio investment/other investment balance (DIPIB/OIB) are calculated in a similar manner. GDP per capita (Y/c) based on purchasing power parity (millions of current international dollar). Reserve accumulation (RA) is the sum of change in foreign exchange reserves. Countries are classified into high or middle income countries based on the World Bank income group classifications. Source: WEO. (http://personal.ac. 7. is taken as an annual average over the regression sample period. We use the average over the years corresponding to the regression sample period as an indicator of each country’s exchange rate regime flexibility. multiplied by 100. Current account/Capital account surplus years (CAS/KAS): Number of years with net inflows into the account as a proportion of the total number of years that corresponds to the regression sample period. Exchange rate flexibility (ERF) is identified based on the historical de facto fine classification provided by Ilzetzki et al. 2. taken as a ratio to average annual GDP. Each year’s regime is assigned a number between 1 and 14. scaled by the average annual nominal GDP.

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