The opposite is unsterilized intervention, where monetary authorities have not insulated their country’s domestic money supply and internal balance against foreign exchange intervention. In the 1930s and in the 21st century, sterilization has most commonly been associated with efforts by nations with a balance of payments surplus to john sloman economics pdf currency appreciation.
To prop up the value of the nation’s currency, the central bank may resort to creating artificial demand for its currency. First the bank is directly removing some of the nation’s currency from circulation as it buys it up. This deficit sends currency out of the country, further decreasing liquidity. The resulting lowering of the money supply likely will have a deflationary effect which can be undesirable, especially if the country already has substantial unemployment.
To offset the effect on the money supply, the central bank may sterilize its foreign exchange intervention. It can do this by engaging in open market operations that supply liquidity into the system, by buying financial assets such as local-currency-denominated bonds, using local currency as payment. A sterilized intervention against depreciation can only be effective in the medium term if the underlying cause behind the currency’s loss of value can be addressed. This involves market participants borrowing domestically and lending internationally at a higher rate of interest, a side effect of which is to exert downwards pressure on the currency being borrowed. Because a sterilizing intervention holds the money supply unchanged at its high level, the locally available interest rates can still be low. The carry trade therefore continues to be profitable and the central bank must intervene again if it still wants to prevent depreciation. This can only go on so long before the central bank runs out of foreign currency reserves with which to intervene.
A central bank can intervene on the foreign exchange markets to prevent currency appreciation by selling its own currency for foreign currency-denominated assets, thereby building up its foreign reserves as a happy side effect. The expansion of the money supply can cause inflation, which can erode a nation’s export competitiveness just as much as currency appreciation would. The classic way to sterilize the inflationary effect of the extra money flowing into the domestic base is for the central bank to use open market operations where it sells bonds domestically, thereby soaking up new cash that would otherwise circulate around the home economy. A variety of other measures are sometimes used. In contrast to interventions against currency depreciation, there is no inherent limit on interventions aimed at preventing appreciation. If a central bank runs out of domestic currency to buy foreign reserves, it can always print more.
There can also be political pressure domestically if commentators feel too big a loss is being made by the sterilisation operations. So if one country enjoys a trade surplus, this results in it enjoying a net inflow of gold from its deficit trading partners. The automatic balancing mechanism is then for the surplus nation’s money supply to be expanded by the inflowing gold. To prevent the expansion of the money supply, central banks can effectively build up hoards of gold by employing a variety of measures such as increasing the amount of gold that banks need to store in their vaults for each unit of paper currency in circulation. Sterilization was used by the US and France in the 1920s and 1930s, initially with some success as they built up huge hoards of gold, but by the early 1930s it had contributed to a collapse in international trade that was harmful for the global economy and especially for the surplus nations. Paul Krugman and Maurice Obstfeld, “International Economics, Theory and Policy”, Addison Wesley, 2003, 6th Edition, pgs.
This page was last edited on 13 March 2017, at 15:18. He also received honorary degrees from various universities, such as from Harvard University. With almost a thousand highly cited publications, he was one of the most influential social scientists of the twentieth century. An inventor who was granted “several dozen patents”, his father also was an independent patent attorney. Simon’s father was Jewish and his mother came from a family with Jewish, Lutheran, and Catholic backgrounds. Simon called himself an atheist. Simon was educated as a child in the public school system in Milwaukee where he developed an interest in science.
He found schoolwork to be interesting and easy. Through his uncle’s books on economics and psychology, Simon discovered the social sciences. He was interested in biology, but chose not to study it because of his “color-blindness and awkwardness in the laboratory”. He chose instead to focus on political science and economics.