Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/217334 
Year of Publication: 
2019
Citation: 
[Journal:] Central Bank Review (CBR) [ISSN:] 1303-0701 [Volume:] 19 [Issue:] 3 [Publisher:] Elsevier [Place:] Amsterdam [Year:] 2019 [Pages:] 93-105
Publisher: 
Elsevier, Amsterdam
Abstract: 
Some small open Least Income Countries embarked on rapid accumulation of foreign reserves in the wake of volatile capital inflows. Foreign reserve accumulation is one way of managing volatile capital flows. However, rapid and persistent accumulation is not only costly, but potentially distort the domestic financial markets, especially when it is financed by sterilisation. This study investigates the potential distortions on commercial bank lending in Uganda. Our empirical results show that sterilised reserve purchases crowd-out bank lending. The crowding-out effect is persistent even when bank capitalisation and shifts in monetary policy regimes are controlled for, which raise important policy implications. The objective of sterilisation is to maintain the prevailing stance of monetary policy. However, when it alters the prevailing stance of monetary policy and consequently the direction of the impact of policy as the empirical result has shown, then sterilised reserve purchases violate the "impossible trinity" i.e. it weakens the monetary authority's control over domestic monetary conditions.
Subjects: 
Sterilisation instruments
Crowd-out
Reserve accumulation
Least income countries
Uganda
Trilemma
Impossible trinity
Pooled mean group estimator
JEL: 
E44
E52
E58
G21
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Article

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