On the denomination of government debt. A critique of the portfolio balance approach

David K. Backus, Patrick J. Kehoe

Research output: Contribution to journalArticlepeer-review

37 Scopus citations


We show that some classes of sterilized interventions have no effect on equilibrium prices and quantities. The proof does not require complete markets, Ricardian equivalence, monetary neutrality, or the law of one price. Moreover, regressions of exchange rates or interest differentials on variables measuring debt's currency composition contain no information about the affectiveness of such interventions. Other interventions require changes in monetary and fiscal policy; their effects depend, generally, on the influence of these changes on the economy and not on the intervention alone. In short, sterilized intervention is not, as the portfolio balance approach indicates, an extra policy instrument.

Original languageEnglish (US)
Pages (from-to)359-376
Number of pages18
JournalJournal of Monetary Economics
Issue number3
StatePublished - May 1989

Bibliographical note

Funding Information:
*The authors thank Larry Chrisfiano, Kent Kimbrough, Peter Neary, Lars Svensson, and Neil Wallace for helpful comments on earlier versions of this paper, Kathy Rolfe for editorial assistance, and the National Science Foundation for financial support. Any views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.


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