Question

Assume a freely floating exchange rate between the U.S. and Thailand. If US government wanted to use the exchange rate to increase U.S. exports to Thailand, explain the action the US government would take, assuming no sterilization. The Thai currency is the Baht.

Assuming the U.S, government wanted sterilized intervention, explain what other action the US government would take.

Answer 1

Sterelization: An attempt by central bank of the country to buy/sell current inorder to influence exchange rate is called sterilization.

Where Sterilization is not the option to boost the exports to that country, the following options can be used

1. Making Modifications to the the export and import policies

2. Creating duty drawback schemes

3. Removing any restrictions on export and by providing free trade with a specific country, if required.

4. Devaluating the currency. eg. China.

When the governments opts the Strerilization as a method

1. They would first sell the foreign currency assets

2. Subsequently, create a open market transaction to purchase US Treasury bills.