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Foreign Exchange Market Intervention: Amie Colgan, Mary Deely, Fergus Colleran, Anna Nikolskaya
Foreign Exchange Market Intervention: Amie Colgan, Mary Deely, Fergus Colleran, Anna Nikolskaya
Buy domestic currency and sell foreign assets money supply production inflation domestic interest rates demand for investment Increases exchange rate
Sell domestic currency and purchase foreign assets money supply production domestic interest rates demand for investment Decreases exchange rate
Why Intervene?
Stabilise Fluctuations
International trade and investment decisions Dependent on exchange rates
Types of Intervention
Sterilized Intervention has little or no effect on the exchange rate Unsterilized Intervention has a higher impact on exchange rates
Unsterilized Intervention
Central Banks purchase/sell domestic currency to sell/purchase foreign assets which expands/contracts the monetary base.
These actions may decrease/increase the money supply which in turn affects prices, inflation and in turn interest rates . Passive approach of intervention by Central Banks.
Allows for foreign exchange markets to function without manipulation of the supply of domestic currency.
Has a higher effect on interest rates and liquidity.
Unsterilized Intervention
Unsterilized Intervention is used when a Central Bank wants to change its monetary conditions
It has an overall greater effect on money supply interest rates and foreign exchange rates.
It takes time to come into effect, not useful if Central Bank wants an immediate change in exchange rates. Has long term effects on the exchange rates. Not used as often because it conflicts with monetary policy.
Sterilized Intervention
Buying or selling domestic currency in order to sell or purchase foreign assets to slightly affect exchange rates. This can expand or contract the monetary base. Sterilising means offsetting this expansion/contraction by selling or purchasing government bonds in the domestic bond market to bring back the monetary base to its target level. When Central Banks want to leave money supply and interest rates unaffected. Maintains price stability
Sterilized Intervention
Intervention in exchange rates without affecting its domestic liquidity.
Process limits the amount of domestic currency available for exchange. Altering its debt composition without affecting its monetary base. Sterilised Intervention has little effect on long-term exchange rates. Almost immediate effect on demand and supply of foreign exchange.
Affects expectations about future exchange rates, particularly if open market operations are hidden.
Its effect on exchange rates is not as obvious an Unsterilized intervention.
Motivation: (1) Resist short run trends in exchange rates (2) Correct medium-term misalignments of exchange rates away from fundamental values
Decline in the frequency of intervention
Federal Reserve
Quantitative Easing
Wed 18/3/09 Fed announced it is to buy $300 billion in long term treasuries & $750 billion in mortgage-backed securities Create more liquidity print money
Euro rose 3.2% to $1.342 after the statement
14th February
Swiss Franc
Bank of England
5th March
British Pound