Monetary Policy Reaction Function and Sterilization of Capital Inflows: An Analysis of Asian Countries

Muhammad Saim Hashmi, Changsheng Xu, Muhammad Mahroof Khan, Mohsin Bashir, Faheem Ghazanfar


The study was mainly focused on estimation of monetary policy reaction function and degree of sterilization for the sample comprising of Pakistan, Korea, Philippines and Japan by using quarterly data ranging from 1980-1 to 2007-2. The study has used Johansen multivariate co integration technique. We conclude that over the period of study all the central banks of these countries have conducted a strong sterilization policy, but not fully sterilized the capital inflow. These countries have used the sterilization policy, though it is different in magnitude for different countries. Results show that in all the economies whether they are agriculture or non-agriculture they sterilized their capital inflows in the long run. Short run adjustment towards the long run equilibrium shows high value of adjustment for Korea and Philippines while for Pakistan its coefficient shows very little adjustment. On the other hand Korea and Philippines has shown comprehensive adjustment policies towards long term adjustment.

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