Question

Answer the following questions regarding the effects of indirect intervention.
Suppose that the government of Chile reduces one if its key interest rates. The values of several other Latin American currencies are expected to change substantially against the Chilean peso in response to the news.
a. Why could other Latin American currencies be affected by a cut in Chile's interest rates? (10 points)
b. How would the central banks of other Latin American countries likely adjust their interest rates? How would the currencies of these countries respond to the central bank intervention?

Answer 1

a). The relative interest rates of a particular nation somewhat operates the exchange rates. The currency in chile is usually called as chikiean peso.When there is a cut happened in the interest rate of chile, since the interest rate in chile is not highly good to the investors, it may result in the exchange of lesser available funds.

The investments has been done also to the other nations of latin america, where they face a severe reduction in the interest rates. If the exchange rates were reduced by these latin american nations, then they may not attain high funds or capital. In they coming years, they may attain very lesser funds or capital. This may result in the reduction of their values.

b). Since many years, the IT central banks in latin america issued reports on inflation inorder to improvise their framework. These banks have been adapted to modern needs for monetary policies.

The central banks of other latin american nations are likely to lesser interest rates. It results the weakening of the currency. Only a lesser interest rate and a dim currency can restore the existing economy of the nation.

Thanks..