Pearson eText Economics of Money, Banking and Financial Markets, The, Business School Edition -- Instant Access (Pearson+)
Question
Book Icon
Chapter 21, Problem 1LO
To determine

The distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets using graphs and T-accounts.

Expert Solution & Answer
Check Mark

Explanation of Solution

Sterilized intervention Unsterilized intervention
This form of intervention has no impact on the short-term interest rate, it is, therefore, sterilized.

It is signified as independent of the money market rate but it may occasionally influence the market perceptions and trends based on expectations.

This form of intervention has an impact on the short-term interest rate, it is, therefore, unsterilized.

It is characterized by influencing interest rates in the money market and also by signaling that an upward/downward trend may ensure which affects expectations of the future exchange rate.

Pure foreign-exchange-policy A mix of monetary-policy and foreign-exchange-policy operation.
Central Bank takes active balance-sheet measures to sterilize the intervention No follow-up required by Central Bank
Example − Central Bank purchasing domestic currency by selling foreign assets, which would affect the availability of foreign exchange. Example − Central Bank deliberately changes the interest rate in the country as a part of its monetary policies, affecting the demand and supply of foreign currency.

Explanation for Sterilized intervention: In this case, the sterilized intervention does not affect either the monetary base, and no effect on interest rates is seen, nor the demand and supply of foreign exchange. It is largely based on expectations and other influences on market. Thus, no graph is used.

Explanation for Graph of Unsterilized intervention: In this case, the exchange rate X goes up to X1 as soon as the interest rates in the US market increases. We may also say that because of this higher interest rate, the supply of US dollars reduces (foreign investor who would not be willing to pay this level of interest will withdraw their investments, new investor will also not be attracted), which also brings about an increase in the price of the exchange rate of dollars.

Pearson eText Economics of Money, Banking and Financial Markets, The, Business School Edition -- Instant Access (Pearson+), Chapter 21, Problem 1LO

Economics Concept Introduction

Introduction:

A central bank holds large reserves of foreign currency. It has the capability of intervention by way of purchasing or selling of foreign exchange in the markets to influence the foreign currency prices. Both sterilized and unsterilized interventions have an effect on the foreign exchange market.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education