Abstract
It is widely believed that sterilized FX interventions do not affect domestic currency interest rates. The reason is the word “sterilized.” Yet we show in this paper that when a collateral base for central bank operations isn’t big enough, sterilized interventions may still affect interest rates, loan extension, and, hence, real economy (beyond the effects of altered exchange rate). The mechanism is simple and works through the liquidity risk premium. We demonstrate the importance of this channel through theoretical as well as empirical perspectives. Our modeling framework also provides interesting insights about a relationship between a liquidity risk and reserve requirements, among other results.
Authors
- Shalva Mkhatrishvili
- Giorgi Tsutskiridze
- Lasha Arevadze
JEL codes
- E43
- E58
- F31