Document Type

Article

Language

eng

Format of Original

18 p.

Publication Date

1-1997

Publisher

Elsevier

Source Publication

Journal of Economics and Business

Source ISSN

0148-6195

Original Item ID

doi: 10.1016/S0148-6195(96)00040-9

Abstract

In this paper, a two-country leader-follower model with imperfect asset substitution is used to derive the optimal sterilization coefficients for two-country flexible and fixed exchange rate regimes. It is found that, in general, incomplete sterilization is optimal. However, both the origin and the type of macroeconomic shocks the economies experience are important in determining the appropriate degree of sterilization. We also find that sterilization policies have spill-over effects (strategic complements) in both cases. Thus, in a competitive policy-making environment, greater sterilization by one country leads to greater sterilization by the other country. Further, the impact of increasing capital market integration is examined in particular. We show that greater integration compounds this problem, leading to full sterilization as the optimal outcome under perfect capital mobility.

Comments

Accepted version. Journal of Economics and Business, Vol. 49, No. 1 (January 1997): 43-60. DOI.Published under Creative Commons license Attribution-NonCommercial-NoDerivatives 4.0 International.

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