NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Can We Sterilize? Theory and Evidence

Maurice Obstfeld

NBER Working Paper No. 833 (Also Reprint No. r0271)
Issued in July 1982
NBER Program(s):   ITI   IFM

This paper is a highly selective review of our knowledge about the scope for sterilized intervention in foreign exchange markets under alternative exchange-rate regimes. Section I demonstrates the potential importance of simultaneous-equations bias in single-equation econometric studies of the capital-account offset to monetary policy under fixed exchange rates. The empirical record suggests that, in the case of West Germany, sterilization was a feasible short-run monetary strategy in the 1960s. Section II notes that there is considerable recent evidence of imperfect asset substitutability under the managed float. While limited substitution between bonds of different currency denomination is a precondition for the efficacy of sterilized foreign-exchange intervention, it is no guarantee of efficacy. Whether limited substitutability can in fact be exploited in a predictable manner by central banks is a distinct, and unanswered, question.

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Document Object Identifier (DOI): 10.3386/w0833

Published: Obstfeld, Maurice. "Can We Sterilize? Theory and Evidence." The American Economic Review, Vol. 72, No. 2 (May 1982), pp. 45-50. citation courtesy of

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