Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/39060
Year of Publication: 
2010
Series/Report no.: 
CESifo Working Paper No. 3138
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Given buoyant capital inflows and managed exchange rates the majority of emerging market central banks have continued to accumulate massive foreign reserves. If left unsterilized, the liquidity expansion can threaten domestic macroeconomic stability. To contain domestic inflation these central banks absorb rather then provide liquidity in their regular monetary policy operations. Based on an augmented Barro-Gordon framework we show that inflation targeting within an environment of surplus liquidity is less efficient, because absorbing liquidity raises the costs of monetary policy operations. By implementing sterilization costs into the central bank's objective function the inflation bias increases.
Subjects: 
inflation targeting
exchange rate targeting
sterilization
debtor central bank
JEL: 
E52
E58
Document Type: 
Working Paper
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