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Central Bank Case Study

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Why the simultaneous targeting of the money supply and interest rates is sometimes impossible to achieve?
The fact is that the central bank can not simultaneously regulate both the money supply and the interest rate, since both these indicators determine the coordinates of the money market equilibrium point. If the central bank aims to maintain the interest rate at an unchanged level, then as the interest rate rises as the demand for money increases, the central bank must increase the money supply, and so it can not control the amount of the money supply, and it becomes of an exogenous amount by an endogenous value, completely subordinate goal of keeping the interest rate unchanged. Conversely, if the central bank aims to maintain a constant …show more content…

The state exercises its influence on the foreign exchange market through central banks. If the central bank of a certain state does not intervene at all in currency exchange transactions by buying and selling foreign currency in the international foreign exchange market, the domestic currency is in a state of "free float". In practice, this happens very rarely. Countries with floating rates from time to time try to influence the exchange rate of their currency by using foreign exchange operations. This state of the currency is called "dirty swimming".
In the interests of developing production and increasing consumption, states must deal with the regulation of the exchange rate. Usually direct and indirect regulation is used. Indirect regulation is carried out through the amount of money in circulation, the level of inflation, etc.
Currency interventions are associated with a sharp outflow or the same sharp withdrawal of significant amounts of currency from the international market. The central bank's exit to the foreign exchange market occurs through commercial banks. Since volumes are very large (billions of dollars), foreign exchange interventions lead to significant movements in exchange …show more content…

Often this is done at the expense of an additional issue of banknotes. If you want to raise the monetary unit in the price, the central bank buys its own currency in the international currency market. Such acquisition of own currency occurs at the expense of the bank's foreign currency.

For example, the National Bank of Switzerland (SNB) has recently pursued a policy of cheap Swiss francs. Therefore, when there was a significant rise in price, the National Bank of Switzerland "went out" to the market and added liquidity (increased the supply of francs in the market at a lower interest rate) and thereby lowered the exchange rate of the national currency.

What the Bretton Woods Agreement did to the ability of foreign exchange rates to fluctuate

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