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This research seminar on Monday, June 23, 2008 featured noted economist Arnold C. Harberger, Professor of Economics, University of California, Los Angeles; USAID Chief Economic Advisor, and Gustavus F. and Ann M. Swift Distinguished Service Professor Emeritus, University of Chicago, and focused on his theory of “sterilization by the people.”
Large, continuing inflows of foreign exchange in China from foreign direct investment and in Russia from oil sales have not been followed by higher rates of inflation and faster real exchange rate appreciation in those countries, as one would normally expect from the resulting growth in the domestic money supply. This discussion will identify a factor that is overlooked by most economists—that people in those countries have chosen to hold larger real cash balances of their own currency, in an effect termed “sterilization by the people.” Sterilization by the people acts to counter the increase in the domestic money supply caused by large inflows of foreign exchange, thereby reducing both the inflationary pressure on the non-tradable sector of the economy and the real appreciation of the currency normally associated with Dutch disease.