Unsterilized Intervention

Understanding Unsterilized Intervention

The term 'Unsterilized Intervention' refers to an action taken by a country's monetary authority, usually the central bank, to influence the exchange rate without changing the monetary base. Central banks frequently intervene in forex markets to stabilize their currency if they feel that it is too high or too low and may cause economic damage.

Unsterilized Intervention's Mechanism

In an Unsterilized Intervention, central banks buy or sell their currency in the forex market and do not aim to sterilize the impact on their money supply. For example, if a central bank believes its currency's value is too high, it may sell its own currency to bring down its value. It leaves the money it gets from selling domestic currency (foreign currency) in the system. This action may lead to an increase in money supply, potentially causing inflation.

The Impact of Unsterilized Intervention

The impact of an Unsterilized Intervention goes beyond the forex market. As the money supply increases after a Central bank's intervention, this could create inflation. But, on the positive side, it could also stimulate economic growth because currency depreciation can make a country's exports cheaper, leading to an increase in exports.

Unsterilized Intervention vs. Sterilized Intervention

While an Unsterilized Intervention directly impacts the money supply, its counterpart, the sterilized intervention, neutralizes its effect on the money supply. A sterilized intervention involves selling or buying foreign currency and simultaneously offsetting this with domestic open market operations. Therefore, the key difference lies in whether or not the intervention affects the domestic money supply.

In Summary

While unsterilized interventions have potential risks such as inflation, they can provide quick currency adjustments and stimulate economic growth if executed correctly. The decision to use this tool as part of the monetary policy strategy largely depends on the country's economic circumstances and its central bank's objectives.