Open AccessDo managed exchange rates and monetary sterilization encourage capital inflows?
Author(s) -
Vandana Arya,
Tony Cavoli,
İlke Onur
Publication year - 2020
Publication title -
plos one
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.99
H-Index - 332
ISSN - 1932-6203
DOI - 10.1371/journal.pone.0238205
Subject(s) - sterilization (economics) , monetary economics , exchange rate , interest rate , portfolio , transaction cost , interest rate parity , economics , capital (architecture) , international economics , exploit , business , foreign exchange market , finance , computer security , archaeology , computer science , history
Economies with exchange rate pegs generally attract higher capital inflows either through lower transaction costs of trade and finance, or by encouraging investors to exploit any interest differentials, or where foreign exchange (FX) interventions are sterilized, any previous interest differentials are preserved. This paper examines these relationships using FDI, portfolio and bank inflows for 28 emerging market economies. We find that greater fixity of the exchange rate and sterilized intervention can potentially encourage capital inflows, and that the effect is magnified when combined. Further, we find that the effect differs by region, and it is larger for higher inflows.