Quick Answer: What is meant by sterilization of the effects of foreign exchange market intervention?

What is sterilized foreign exchange intervention?

Sterilized intervention is the purchase or sale of foreign currency by a central bank to influence the exchange value of the domestic currency, without changing the monetary base.

What is impact of sterilized intervention on economy?

Because a sterilizing intervention holds the money supply unchanged at its high level, the locally available interest rates can still be low. The carry trade therefore continues to be profitable and the central bank must intervene again if it still wants to prevent depreciation.

Do sterilized interventions affect exchange rates?

Thus, if a current sale of foreign exchange by the central bank signals future monetary contraction, then the home currency will appreciate immediately even if the intervention is fully sterilized so that the money supply did not change in the current period.

What is sterilization in macroeconomics?

In macroeconomics, sterilisation is an action taken by the central bank of a nation to counter the effects on the money supply triggered by a balance of payments surplus or deficit.

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What is sterilized and non sterilized intervention?

Intervention is the term used to describe a central bank’s purchase or sale of foreign exchange in the market in order to influence the exchange rate. … If the intervention has no impact on the short- term interest rate, it is sterilised. If the short-term interest rate is affected, the intervention is non-sterilised.

What are the methods of sterilization?

Other Sterilization Methods

  • Ionizing Radiation.
  • Dry-Heat Sterilizers.
  • Liquid Chemicals.
  • Performic Acid.
  • Filtration.
  • Microwave.
  • Glass Bead “Sterilizer”
  • Vaporized Hydrogen Peroxide (VHP®)

Why might a central bank want to sterilize its exchange rate intervention?

Central banks use sterilization as a way to insulate or protect their economies against any negative impact from things like currency appreciation or inflation—both of which can reduce a country’s place in export competitiveness in the global market.

What is non sterilized intervention?

Nonsterilized intervention. Taking an action in the foreign exchange market without adjusting for changes in money supply.

What is meant by sterilization of gold in the inter war period?

The United States returned to a gold standard in 1919. During the intermittent period, many countries followed a policy of sterilization of gold by matching inflows and outflows of gold with changes in domestic money and credit.

What is the negative side effect on the money supply of a non sterilized foreign exchange intervention?

What is the negative side effect on the money supply of a non-sterilized foreign exchange inter vention? 2 In the pegged exchange rate system, the exchange rate tends to overvalue the domestic currency. So, it is difficult for governments to maintain it.

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Why might the Bank of Canada want to sterilize its foreign exchange market intervention?

To make sure that the Bank’s purchases do not take money out of circulation and create a shortage of Canadian dollars, which could put upward pressure on Canadian interest rates, the Bank “sterilizes” its purchases by redepositing the same amount of Canadian-dollar balances in the financial system.

Is sterilized or unsterilized intervention more effective?

The results show that non sterilized intervention will be more effective than sterilized intervention in affecting both the exchange rate and domestic interest rate.