Question

Design a sterilized forex market intervention aimed at devaluing our currency. Briefly explain how our central bank would implement this.

Answer 1

To devalue currency, the central bank will buy foreign currency denonminayed bonds increasing supply if domestic currency. This will lead to currency devaluation but as Central bank has increased supply of domestic currency, so, it has to reduce money supply within the economy to keep te monetary base unchanged. For this central bank can use open market sales which is sale of government securities leading to decrease in monetary base which offsets the increase in monetary base due to foreign exchange intervention for devaluation of the currency.

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