Exchange Rate Regimes, Interventions, and the Money Supply

Edward E. Ghartey
Additional contact information
Edward E. Ghartey: The University of the West Indies

Chapter Chapter 12 in International Macroeconomics and Finance, 2025, pp 231-246 from Springer

Abstract: Abstract In this chapter, we have discussed unsterilized foreign exchange intervention where the central bank sells foreign assets to the nonbanking public. It results in contraction of money supply which results in increase in interest rate and depreciation of exchange rate. In a situation where the central bank sells foreign assets and turns around to use the proceeds to purchase bonds from the public, the net effect of the policy is zero, as the interest rate remains the same. The policy is referred to as a sterilized intervention. In the situation of a flexible exchange rate regime, the market determined exchange rate requires no central bank intervention. However, under a fixed exchange rate, there is a need for the central bank to enforce the par value of the exchange rate. Thus, an over-valued exchange rate where the market determined exchange rate is below the par value the central bank has chosen, there is a need for the central bank to use sterilized intervention to maintain the par value of the over-valued exchange rate. Similarly, the central bank must use reverse policy intervention to defend the par valued exchange under a fixed exchange rate regime. Speculation becomes a serious threat when the central bank is operating a fixed exchange rate regime. In such situation an over-valued fixed exchange rate is worsened by speculators who tend to demand more of the stronger currency and worsen the situation by hoarding it. The situation of mobility of capital market is also discussed. In this situation, the oil that will be required to ensure smooth running of market forces will be absence of restrictions and barriers associated with higher taxes or tariffs.

Date: 2025
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-032-04145-6_12

Ordering information: This item can be ordered from
http://www.springer.com/9783032041456

DOI: 10.1007/978-3-032-04145-6_12

Access Statistics for this chapter

More chapters in Springer Books from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().