The interest-rate management and sterilization hypotheses for the UK: under fixed exchange rates

Abstract

This study uses the vector autoregressive (VAR) technique and Granger's definition of causality to examine the interest rate management and sterilization hypotheses of UK for the period 1955.I to 1974.IV. Our findings show that neither the long-term government bond yield nor long-term treasury bill rate of UK can be considered as a policy-determined variable, since each is subject to feedback from UK and US monetary and income variables. In regard to the sterilization hypothesis, our results indicate that the UK domestic credit is an exogenous variable with respect to UK foreign reserves and interest rates. This result supports the implication of the monetary approach to the balance of payments that there was no sterilization in the UK during the fixed exchange rate period.