Central Banks and Intervention methods

drona · February 5th, 2004, 2:46 pm

I am looking for some material that would tell me how central banks intervene in currency markets.It is widely reported that Asian central banks to stop appreciation of the local currency would haveto BUY USD and SELL local currency. This leaves a lot of local currency in the market which will leadto inflation too. Any pointers/materials that describe this greatly appreciated.

Johnny · February 5th, 2004, 3:28 pm

A central bank would sterilize the intervention by issuing local-currency bonds. Investors use local-currency to buy the bonds, thus reducing the amount of local currency in circulation. I did a quick Google on "sterilize currency intervention" and came up with this page from the Bank of CanadaHTH

xanadu · February 5th, 2004, 5:59 pm

This can create quite a problematic situation for central banks, though. Most central banks don't enjoy quite the tightness of credit spreads that our esteemed Treasury does - which is kind of hilarious given there recent abuse of creditors. This is obviously even more true of emerging economies. So, immunizing in this instances can be quite costly (lend at US rate borrow at emerging market rates). There is a an article in the Economist this week about this, in reference to the notorious accumulation of Treasuries by Asian central banks.