The sustainability of monetary sterilization policies

The focus of this paper is on policies that set out simultaneously tocontrol the exchange rate and monetary conditions (an instrument interestrate, for example); in situations where capital mobility is unrestricted, thereis an excess supply of international currency and the central bank setstargets for the exchange rate and interest rate. The paper calculates howhigh the local interest rate can go at any time without rendering monetarysterilization policy unsustainable, defines the degree of monetary autonomyas the difference between this rate on the one hand and the sum of theinternational interest rate and the rate of increase in the exchange rate onthe other, and analyses how the degree of autonomy evolves. Numericalexamples using data from Argentina and elsewhere suggest that sterilizationpolicy is sustainable and that a considerable degree of monetary autonomyexists in contexts that are by no means unusual in many developingeconomies.