What is the effect of a foreign exchange intervention on the money supply? How can a central bank offset this effect and still hope to influence the exchange rate?
What will be an ideal response?
When a central bank buys (sells) foreign currency, its international reserves increase (decrease), and the money supply increases (decreases) simultaneously. To offset the effect on the money supply, the foreign exchange intervention can be sterilized; that is, the central bank can perform an open market operation that counteracts the effect on the money supply of the original foreign exchange intervention. The direct effects of a sterilized intervention are two-fold. First, it forces a portfolio shift on private investors, by replacing foreign bonds with domestic bonds (or vice versa). This may affect expectations and prices. Second, the actions of the central bank in the foreign exchange markets, while very small relative to the nominal trading volumes, may still manage to squeeze foreign exchange inventories at dealer banks and generate pricing effects. Indirectly, the central bank can signal its opinion on the fundamental value of the exchange rate through an intervention that consequently affects market expectations. There is no consensus on how effective sterilized interventions are in affecting the level and volatility of exchange rates.
You might also like to view...
Leading global change is
A. a well-understood process with models and theories underpinning it. B. just like leading domestic change. C. like leading domestic change, but exponentially more complex due to globalization. D. similar in every location on the globe.
Which of the following is NOT a major model of comparative corporate governance?
a. Shareholder capitalism b. Social capitalism c. Stakeholder capitalism d. State capitalism
Malaki has a contract to purchase a new smartphone. The law governing this contract is Article 2 of the UCC
Indicate whether the statement is true or false
How will an organization use its transportation driver if it focuses on a highly effective supply chain?
A. Increase the price of its products by using slower, less expensive transportation methods. B. Decrease the price of its products by using slower, less expensive transportation methods. C. Increase the price of its products by using faster, more costly transportation methods. D. Decrease the price of its products by using faster, more costly transportation methods.