Limits of Monetary Policy Autonomy of East Asian Central Banks

Abstract

East Asian central banks have accumulated large stocks of foreign reserves over the last two decades. Important driving forces were protracted capital inflows that triggered interventions in the foreign exchange market to soften appreciation pressures. The accumulation of foreign reserves created surplus liquidity, which can lead to undue monetary easing and risks to price and financial stability. This resulted in extensive liquidity absorbing measures. Central bank losses will be more likely, if the interest rate differential to the anchor currency country is positive and the exchange rate appreciates. Given that the central banks care about these losses, monetary policy autonomy is limited.