Global Financial Integration, Monetary Policy and Reserve Accumulation: Assessing the Limits in Emerging Economies

Abstract

This paper assesses whether domestic costs of reserve accumulation-and in particular monetary costs-constitute an eventual limit to the process in emerging markets. We find that sterilization is the first measure to deal with these costs. Then, we turn to study whether diminishing ability to deal with the monetary inflows through sterilization is an effective limit to the process, Indeed, when the scope for sterilization is reduced, accumulation diminishes. However, this constraint, albeit relevant in practice, has not constituted an effective limit to accumulation, hitherto.

Capital Flows and Money Supply: The Degree of Sterilization in Pakistan

“…There was a strong association between the exchange rate and capital flows. Alberola and Serena (2007), investigated the global financed integration monetary policy and reserve accumulation; assessing the limits in emerging economics. Sterilization was implemented through the market instrument open market instrument and to less extent to the fiscal policy managements.…”

Reserves, Sovereign Wealth Funds and the Resilience of Global Imbalances

“…The policy objectives of this strategy can be diverse: to foster competitiveness; to avoid exchange rate overshooting induced by short‐term volatile capital inflows or transitory shocks; or to avoid negative sectoral impacts on some exposed sectors (Dutch disease), a reason closely connected to positive commodity shocks, etc. (see Alberola and Serena (2007) for a more detailed discussion).…”

“…These doubts are justified by the growing costs that the accumulating reserves entail, even if the accumulation is sterilized. Large‐scale sterilization (through debt issuance) creates different types of problems (see Alberola and Serena (2007) for a detailed account of the costs). If sterilization is carried out with central bank instruments, these problems are: crowding out and reduction in credit to the private sector, putting upward pressure on domestic interest rates, generating distortions in the domestic banking systems and can even generate problems in domestic financial stability if the portfolios of the domestic financial intermediaries become too biased toward sterilization instruments.…”

“…Mohanty and Turner (2005) point out that – up to that year – interventions did not push up domestic interest rates in reserve accumulating countries. The empirical analysis in Alberola and Serena (2007) shows that the accumulation is positively related by the scope of sterilization, but that this has not hitherto become an effective constraint to reserve accumulation. However, the costs of accumulating reserves are there, and growing anecdotal evidence points out they are mounting.…”

Crisis financieras y globalización: un análisis de sus factores determinantes

“…en la actualidad, tales economías acumulan más de dos tercios de las reservas mundiales, y Asia es la principal impulsora de las políticas dirigidas en este sentido. Los superávit por cuenta corriente y las positivas entradas netas de flujos financieros explican en la mayoría de los casos tal acumulación (Rodrik, 2006;Alberola y Serena, 2007). dentemente, mantener a largo plazo tales desequilibrios puede debilitar el papel estabilizador del gobierno.…”