Question

1. Define a sterilized intervention. Explain, possibly with aid of a graph, why sterilized monetary policy is ineffective in a model without imperfect substitutability but possibly effective with it. Why do countries use such a policy?

2. Walk through and reproduce mathematically the derivation of the Fisher equation for models with and without relative PPP. What are the implications of both for the relative price of exports?

Thank you so much

Answer 1

FOREX & CURRENCIES

What Is a Sterilized 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. Sterilized intervention involves two separate transactions: 1) the sale or purchase of foreign currency assets, and 2) an open market operation involving the purchase or sale of U.S. government securities (in the same size as the first transaction).

The open market operation effectively offsets or sterilizes the impact of the intervention on the monetary base. If the sale or purchase of the foreign currency is not accompanied by an open market operation, it would amount to an unsterilized intervention. Empirical evidence suggests that sterilized intervention is generally incapable of altering exchange rates