Jang-Yung Lee, Sterilizing Capital Inflows, Economic Issues 7, IMF, February 1997 It serves as the basic primer explaining

the nature of foreign capital inflows as the double sword inflicting rather less welcome and destabilizing side effects, including a tendency for the local currency to gain in value, undermining the competitiveness of export industries, and potentially giving rise to inflation, thus bringing in the need for a sterilization operation to happen in the economy. Further the various instruments of sterilization including Open Market Operations (OMO) which is the primarily used tool are discussed along with their relative advantages and limitations. Apart from OMO, the other tools are listed as: discount policy and directed lending, changes in reserve requirements, holding of government deposits, foreign exchange swaps, wider exchange rate bands, intervention in forward exchange market, easing restrictions on capital outflows, variable deposit requirements and interest equalization taxes. Due to the presence of limitations linked with the use of traditional instrument of OMO and other supplementary instruments when used solely especially in developing economies, many countries have resorted to stitching up different instruments together for a more effective operation while reducing the costs of sterilization at the same time. This paper draws its conclusions from an examination of the experience with large-scale and sustained capital inflows in Chile, Colombia, Indonesia, Korea, Spain, and Thailand at various times in the past ten years.
Alice Y. Ouyang, Ramkishen S. Rajan, Thomas D. Willett, China as a reserve sink: The evidence from offset and sterilization coefficients, Journal of International Money and Finance, Volume 29, Issue 5, September 2010, Pages 951-972

This paper analyses the degree of recent sterilization and capital mobility by using sterilization and offset coefficients for China using monthly data from June 2000 to September 2008. It mentions three methodologies which may be used to measure sterilization. The first one as proposed by Kwack, 2001 assumes capital flows are exogenously determined and thus sterilization can be measured by running OLS on monetary reaction function: . In this method, if

c1 : -1 = Full sterilization; 0 = No sterilization. Burdekin and Siklos, 2005 extend it that if Monetary base or M2 are used instead of NDA, c1 = 0 : full sterilization so that rise in NFA does not cause any change in monetary base. The second methodology used by Cavoli and Rajan, 2006; Christensen, 2004; He et al., 2005; Moreno, 1996

uses VAR models to estimate lagged impact of NDA and NFA. If a shock from foreign assets (say an unexpected increase in foreign assets) is associated with an offsetting decrease in domestic money creation, it can be concluded that the sterilization is significant. However an important limitation of the VAR approach is that it tends to treat all variables as symmetrically endogenous. The third group which is followed in the present paper explains the contemporaneous relationship between NDAs and NFAs using a set of simultaneous equations with both as endogenous variables in the system. The equation with NFA as dependant variable is the balance of payment function and this measures the offset coefficient which lies between 0 in case of no capital mobility and -1 for perfect capital mobility. The other equation with NDA as dependant variable is same as depicted above. The vector of control variables which are used in the system of simultaneous equations are: annualised monthly change in money multiplier for M2, annualised monthly change in Consumer Price Index, cyclical income, cyclical fiscal deficit scaled by GDP, annualized monthly change in the real effective exchange rate, annualized monthly change in foreign interest rate plus the expected nominal exchange rate and nominal exchange rate. Both NFA and NDA are scaled by GDP. Results show that China follows a strict sterilization regime and most of the response is finished in a month.
Yung-Hsiang YING, Chung-Ming KUAN, Chris Y. TUNG, Koyin CHANG, Capital mobility in East Asian Countries is not so high: Examining the impact o f sterilization on capital flows, China Economic Review, Volume 24, March 2013, pp. 55-64

This paper examines the effect of sterilization activity conducted by the central bank of a country on its degree of capital mobility. It uses quarterly data from 1980:1 to 2006:4 for seven Asian countries namely Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand. All the results are presented for 1980s, 1990s, 2000s and average of the three periods as a whole. The prime importance of this paper for my study is the expression which it provides to calculate the sterilization index of a country. It further uses a time varying analysis using a five year moving average of a real money balance equation to measure capital mobility with and without sterilization. Major findings as found in this article are: first that capital mobility is reduced in case of central bank undertaking sterilization activities and second that sterilization is more effective in case of countries with low capital mobility whereas the sterilization operations are less effective in countries with highly integrated

financial markets witnessing huge capital mobility. Thus making a point that degree of capital mobility bears a negative relationship with sterilization with both effecting each other.
B. Karan Singh, A. Kanakaraj, T.O. Sridevi, Revisiting the empirical existence of the Phillips curve for India, Journal of Asian Economics, Volume 22, Issue 3, June 2011, Pages 247258

It is a very lucid article which estimates the open-economy Philips curve relation as proposed by Ball (1998) for India using data quarterly data from Q1:1997 to Q3:2010. The open-economy Philips curve is a transformation of the New Keynesian Philips curve which includes the change in real effective exchange rate along with supply shocks. The major methodological differences as adopted by the authors in this article are measurement of output gap using Kalman filter for calculation if potential output instead of the often used Hodrick-Prescott (HP) filter and measurement of inflation using a composite Consumer Price Index (CCPI) instead of Wholesale Price Index (WPI) as constructed by Karan Singh, B. and Joseph, M. (2010). The real effective exchange rate is also calculated by using CCPI. The use of Kalman filter has been proved to be better than HP filter due to the smoothing assumption of it thus showing that use of HP filter in India produces spurious results. Further Kalman filter helps in breaking down the GDP data into two phases viz Q1:1997 to Q1:2004 and Q2:2004 to Q4:2009. A high volatility in output gap is observed in the first phase as compared to the second phase. Moreover the data obtained Kalman filter of potential GDP growth is able to able to explain the different phases of boom and fall and this is in line with the various actual events affecting the economy both internally as well as externally. The authors also explain in detail the effects of both demand and supply shocks by proving that demand shocks have negative impact on inflation thus bringing down the inflation occurring due to output gap but at the same time supply shocks have direct positive impact on inflation and thus cause more problems to the central bank in conducting monetary policy to control inflation. Both graphical and econometric results substantiate the point that after accounting for supply shocks, there is a very positive and significant relationship between inflation and the output gap. They also identify phases of positive and negative supply shocks from their estimates and this finds match in the monthly bulletins of inflation as published by RBI. The econometric estimation is done separately for both the periods as noted above using both OLS and 2SLS using Instrumental Variables. Finally the major findings of the

article show that Philips curve relationship holds true for India but only after controlling for supply shocks which are taken as a dummy variable so as to include an intersecting variable of output gap and supply shock dummy in the estimated model, the real effective exchange rate elasticity of inflation is 0.05 which suggests that the real effective exchange rate has a minimal role in influencing domestic inflation and the threshold inflation in India is six per-cent as also suggested by Chakravarty et. al (1985).