Do managed exchange rates and monetary sterilization encourage capital inflows?

Vandana Arya, Tony Cavoli, Ilke Onur

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Abstract

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.

Original languageEnglish
Article numbere0238205
Number of pages11
JournalPLoS One
Volume15
Issue number8
DOIs
Publication statusPublished - 28 Aug 2020
Externally publishedYes

Keywords

  • foreign exchange
  • foreign capital
  • managed exchange rates

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