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Most often ''sterilization'' is used in the context of a central bank which takes actions to negate potentially harmful impacts of [[capital account|capital inflows]], such as [[floating exchange rate|currency appreciation]], loss of export competitiveness and [[inflation]]. Occasionally it may refer to any form of [[monetary policy]] which seeks to leave the domestic [[money supply]] unchanged in the face of shocks or other changes, including capital outflows. |
Most often ''sterilization'' is used in the context of a central bank which takes actions to negate potentially harmful impacts of [[capital account|capital inflows]], such as [[floating exchange rate|currency appreciation]], loss of export competitiveness and [[inflation]]. Occasionally it may refer to any form of [[monetary policy]] which seeks to leave the domestic [[money supply]] unchanged in the face of shocks or other changes, including capital outflows. |
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Central banks use sterilization to eliminate negative side-effects of their intervention in [[foreign exchange market]]s. For example, assume that a country's currency is depreciating. To prevent this the country's central bank may decide to intervene in the foreign exchange market of the country. To prop up the value of the nation's currency the CB may resort to creating artificial demand for its currency. This it may do by selling [[foreign exchange reserves]] and buying local currency. The resultant demand stops the currency's depreciation but decreases the amount of liquidity in the local economy (the amount of local currency held by banks, credit unions, businesses, individuals, etc). Hence, to offset this negative outcome the CB may engage in open market operations that supply liquidity into the system (by buying local-currency-denominated bonds), thereby "sterilizing" the negative effect of its foreign exchange intervention. |
Central banks use sterilization to eliminate negative side-effects of their intervention in [[foreign exchange market]]s. For example, assume that a country's currency is depreciating. To prevent this the country's central bank may decide to intervene in the foreign exchange market of the country. To prop up the value of the nation's currency the CB may resort to creating artificial demand for its currency. This it may do by selling [[foreign exchange reserves]] and buying local currency. The resultant demand stops the currency's depreciation but decreases the amount of liquidity in the local economy (the amount of local currency held by banks, credit unions, businesses, individuals, etc). Hence, to offset this negative outcome the CB may engage in open market operations that supply liquidity into the system (by buying local-currency-denominated bonds), thereby "sterilizing" the negative effect of its foreign exchange intervention.<ref>[http://abinomics.com/glossary/finance/s/Sterilized-Intervention/ Sterilized Intervention | Abinomics.com]</ref> |
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Revision as of 18:09, 1 June 2010
Sterilization in macroeconomics refers to open market operations undertaken by a country's central bank (CB) whose aim is to neutralize the impact of associated foreign exchange operations.[1]
Most often sterilization is used in the context of a central bank which takes actions to negate potentially harmful impacts of capital inflows, such as currency appreciation, loss of export competitiveness and inflation. Occasionally it may refer to any form of monetary policy which seeks to leave the domestic money supply unchanged in the face of shocks or other changes, including capital outflows.
Central banks use sterilization to eliminate negative side-effects of their intervention in foreign exchange markets. For example, assume that a country's currency is depreciating. To prevent this the country's central bank may decide to intervene in the foreign exchange market of the country. To prop up the value of the nation's currency the CB may resort to creating artificial demand for its currency. This it may do by selling foreign exchange reserves and buying local currency. The resultant demand stops the currency's depreciation but decreases the amount of liquidity in the local economy (the amount of local currency held by banks, credit unions, businesses, individuals, etc). Hence, to offset this negative outcome the CB may engage in open market operations that supply liquidity into the system (by buying local-currency-denominated bonds), thereby "sterilizing" the negative effect of its foreign exchange intervention.[2]
References
- ^ Paul Krugman and Maurice Obstfeld, "International Economics, Theory and Policy", Addison Wesley, 2003, 6th Edition, pgs. 488-489
- ^ Sterilized Intervention | Abinomics.com
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