September 25, 2007    En español

New CEPR Paper Looks at Sustainability of Exchange Rate Targeting and Sterilization

For Immediate Release: September 25, 2007

Contact: Mark Weisbrot, (202) 746-7264
or, Alan Barber, (202) 293-5380 x115

A new paper released by the Center of Economic and Policy Research (CEPR) looks at the conditions under which a central bank can target its exchange rate and still be able to afford to "sterilize" the central bank's interventions in the foreign exchange markets.

The paper, by economist Roberto Frenkel, finds that such policy is sustainable under a fairly broad array of policy conditions and targets. This has important implications for central bank policy. For example, Argentina's central bank has successfully used exchange-rate targeting, while sterilizing its interventions in foreign exchange markets. Over the last five years, Argentina has had the most rapid economic growth in the Western Hemisphere, averaging about 8.6 percent annually, and pulling more than 10 million people across the poverty line.

"Exchange rate targeting by the central bank is not endorsed by the conventional wisdom today but it has played a vital role in Argentina's remarkable economic recovery," said Mark Weisbrot, economist and Co-Director of CEPR. "This paper shows that it can be feasible in many circumstances."

"It is therefore an important contribution to both the policy debate and the economic literature on central bank policy," Weisbrot added.

Central banks often "sterilize" or neutralize the monetary effect of intervening in the foreign exchange markets, by issuing bonds to absorb the increased liquidity that would otherwise be injected into the economy when the government purchases foreign currency. This is done to neutralize the impact of the foreign exchange purchases on domestic interest rates and inflation.

But sterilization has a cost, because of the interest rate that the government must pay on the bonds that it issues. This paper looks at the conditions under which this cost is sustainable, and the conditions under which the central bank can continue sterilizing its intervention in the foreign exchange markets without eroding its policy autonomy.

The paper, including an executive summary, can be downloaded in full here: English, Spanish

About the author: Roberto Frenkel has been Principal Researcher Associate at the Centro de Estudios de Estado y Sociedad (Center for the Study of State and Society, CEDES) in Buenos Aires since 1977 and Professor at the Universidad de Buenos Aires since 1984. Presently he is also Director of the Graduate Program on Capital Markets and teaches graduate courses at the Di Tella and FLACSO-San Andrés universities. He is a member of the United Nations Development Program Advisers Group; member of the Board of the World Institute for Development Economic Research, United Nations University; and member of the Academic Council of the Centro de Economía y Finanzas para el Desarrollo de la Argentina. He has published numerous books and articles in academic journals on macroeconomic theory and policy, money and finance, inflation and stabilization policies and labor market and income distribution, with special focus on Argentina and Latin America.


The Center for Economic and Policy Research is an independent, nonpartisan think tank that was established to promote democratic debate on the most important economic and social issues that affect people's lives. CEPR's Advisory Board of Economists includes Nobel Laureate economists Robert Solow and Joseph Stiglitz; Richard Freeman, Professor of Economics at Harvard University; and Eileen Appelbaum, Professor and Director of the Center for Women and Work at Rutgers University.