The international liquidity explosion and worldwide inflation: The evidence from sterilization coefficient estimates

Abstract

Many commentators have pointed to the huge US payments deficits and international liquidity explosion of the early 1980s as the major cause of the concomitant rapid rates of monetary expansion abroad and subsequent acceleration of worldwide inflation. This international monetarist interpretation rests, however, on the assumption of only limited sterilization of reserve inflows by foreign monetary authorities. This paper uses the major econometric estimates of sterilization coefficients to calculate the implied contributions of the reserve increases of this period to foreign monetary expansion. These suggest that the reserve increases did, in fact, make a non-trivial contribution to global monetary expansion, but that for most countries they were not the dominant cause.