A purchase of international reserves by a central bank could be sterilized by a sale of...

A purchase of international reserves by a central bank could be sterilized by a sale of bonds of the same value. True or false?

Expert Solution

TRUE.

A purchase of international reserves denominated lets say in Euros by a central bank of US by spending dollars will increase the flow of dollars in the currency exchange market and decrease the Euros as it will now be in the US reserves.

Also we know that Currency exchange value is determined by the forces of demand and supply. Now in this case the increase in US dollars and decrease in Euros may appreciate the Euros against the US dollars. The central bank sterlize or negate this by sale of bonds denominated in US dollars. Now for buying that people will need US dollars, thus again the US dollars in market will become equal to the original thus negating the effect of purchasing of international reserves. This is known as sterlization.

Therefore we can say that Sterlization is a type of monetary policy through which the Central bank can regulate the supply of currency in foreign exchange market and can thus regulate its value.

Rahul Sunny answered 2 years ago

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