Governments neutralize the monetary impacts of their foreign exchange activities. This sterilization seeks to prevent foreign exchange transactions from posing as obstacles to the domestic monetary policy objectives. The underlying disturbance is likely to cause conflict between governments. When the underlying disturbance to exchange rate originates from the domestic government, it is likely to pursue inflation objectives through non-sterilized foreign exchange interventions (Auerbach & Kotlikoff, 2009).
While other governments have boundaries on investments relating to international financial markets in different currencies, some governments factor objectives of nominal exchange rates into their financial policy decisions. For instance, the federal government occasionally alters the rate of federal funds while it undertakes compatible foreign exchange activities. Erecting the required monetary policy changes across the sale or purchase of foreign currency has a bigger impact on the foreign exchange rate. This is contrary to initiating this move through open market activities in state securities. Therefore, this justifies governments that officially unsterilized foreign exchange operations....
The magnitude of tactics and techniques is obviously wider that in the case with developed economies' interventions over the last past decades. This is a common case in sections such as the application of direct control with development of financial markets, the use of auctions to market options and adoption of the denomination of foreign currency as an alternative infrastructure. However, most intervention methods come in conventional forms, marked with a liquid part of the predominating wholesale market (Madura, 2011).
References
Auerbach, a.J., & Kotlikoff, L.J. (2009). Macroeconomics: An integrated approach. Cambridge, Mass. [u.a.: MIT Press.
Madura, J. (2011). International Financial Management. Florence, KY: Cengage Learning, Inc.
Yotopoulos, Pan a. (2010). Exchange Rate Parity for Trade and Development: Theory, Tests, and Case Studies. Cambridge Univ Pr.
