The effectiveness and sustainability of foreign exchange market interventions and sterilisation policies
The main motivation for this thesis comes from the lack of studies on issues related to central bank's monetary sterilisation bonds (MSBs) The MSBs have been, in particular, issued in emerging economies to offset the impacts of sterilised FX market interventions. The objectives of this thesis are to examine the impacts of and motivation for sterilised FX interventions and to explore methodologies to assess the sustainability of MSB dependent sterilisation policy. Chapter 2 overviews the main theoretical issues and statistical facts related to sterilisations, Chapter 3 and 4 investigate the impacts, profits and motives of sterilised FX interventions in selected countries, focusing on the asymmetric intervention preferences. Chapter 5 compares the degree of sterilisation and de facto capital mobility focusing on emerging countries under inflation targeting by estimating sterilisation and offset coefficient with panel data for 30 countries. Chapter 6 proposes several methodologies for assessing the sustainability of MSB dependent sterilisation policy. We modify theories of fiscal sustainability and then derive central bank's intertemporal budget constraint, which is separated from the central governments. Several sustainability conditions are obtained, based on cointegration relation between total revenues and expenditures or on central bank's monetary reaction function. Then, the sustainability tests are applied to empirical studies on the Bank of Korea's sterilisation policy.