Standard theory shows that sterilized foreign exchange interventions do not affect equilibrium prices and quantities, and that domestic and foreign currency denominated bonds are perfect substitutes. This paper shows that whenfiscal policy is not sufficiently flexible in response to spending shocks,perfect substitutability breaks down and uncovered interest rate parityno longer holds. Government balance sheet operations can be used as an independent policy instrument to target interest rates. Sterilized foreign exchange interventions should be most effective in developing countries, wherefiscal volatility is large and where the fraction of domestic currency denominated government liabilities is small.
|Keywords:||ekonomska politika, monetarna politika, fiskalna politika, finančni trg, devize, valuuta, plačilna bilanca, portfolio, modeli, economic policy, monetary policy, fiscal policy, financial market, foreign exchange, balance of payments, portfolio, models|
|Work type:||Not categorized (r6)|
|Organization:||EF - Faculty of Economics|
|Publisher:||International Monetary Fund|
|Number of pages:||31 str.|
|Average score:||(0 votes)|
|Your score:||Voting is allowed only to logged in users.|