| Summary: | The dissertation proposes an endogenous money interpretation of the operations of central banks that pursue some type of exchange rate policy and accumulate foreign reserves as a result, by drawing on recent insights from monetary policy implementation. The implications of adopting this approach are twofold. First, the theoretical literature on endogenous money in an open economy needs to be supplemented to account for recent changes in operating procedures, namely the adoption of a floor system, thus relaxing the assumption of an endogenous monetary base while maintaining the notion of an endogenous money supply, even in a situation of an increased liquidity stemming from the country’s balance of payments position of the country. Second, in the absence of a conclusive relationship between foreign reserves and the monetary base, relying on insights from monetary policy implementation could provide a more detailed explanation of the movements in the components of the central bank balance sheet. By approaching the issue on a case by case basis and taking into consideration each country’s institutional details, these issues are further explored by analysing the operations of the Macedonian and Swiss central banks. These experiences further reinforce the interpretation of the sterilization process as an outcome of the efforts of the central bank to uphold a short-term interest rate target in a context of surplus liquidity.
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