01815cas a2200253 a 4500 AALejournalIMF004855 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451866360 1018-5941 BD-DhAAL BD-DhAAL Kumhof, Michael. Monetary Policy in an Equilibrium Portfolio Balance Model / Michael Kumhof, Stijn van Nieuwerburgh. Washington, D.C. : International Monetary Fund, 2007. 1 online resource (31 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Standard theory shows that sterilized foreign exchange interventions do not affect equilibrium prices and quantities, and that domestic and foreign currency denominated bonds are perfect substitutes. This paper shows that when fiscal policy is not sufficiently flexible in response to spending shocks, perfect substitutability breaks down and uncovered interest rate parity no longer holds. Government balance sheet operations can be used as an independent policy instrument to target interest rates. Sterilized foreign exchange interventions should be most effective in developing countries, where fiscal volatility is large and where the fraction of domestic currency denominated government liabilities is small. Mode of access: Internet Nieuwerburgh, Stijn van. IMF Working Papers; Working Paper ; No. 2007/072 Full text available on IMF http://elibrary.imf.org/view/journals/001/2007/072/001.2007.issue-072-en.xml IMF e-Library