Expanding Central Bank Balance Sheets in Emerging Asia: A Compendium of Risks and Some Evidence
Year: 2012
Type: preprint
Abstract: Foreign exchange reserves have grown dramatically in emerging Asia over the past decade. Many of these reserves have been sterilized, via the issuance of non-monetary liabilities by central banks, with the sterilization instruments held largely by domestic banks. We investigate the effects of this process on emerging Asian economies. We find evidence that long run economic performance may suffer, due to resource mis-allocation and reduced investment. We also find that while reserves appear to have helped to protect banks during periods of crisis, they have had little effect during more normal times. Finally, we examine the effect of reserves on central banks and monetary policy. We find that sterilization appears to be incomplete in some cases, with reserves accumulation leading to higher levels of broad money, inflation and credit. Further, sterilization costs, and losses due to currency appreciation, are a potential threat to central bank independence and may bias policy away from raising interest rates or allowing currency appreciation.Full publication: Are Central Bank Balance Sheets in Asia Too Large?
Source: SSRN Electronic Journal
Authors: David Cook, James Yetman
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1576092294