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Four Forms Of Foreign Exchange Intervention

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The money supply and interest rates are dependent variables. You can't move one without changing the other. The money supply is tied to interest rates. When the Federal Reserve wants to adjust the money supply, it changes interest rates. If interest rates go up, the money supply tightens, as there are fewer projects that can meet the required rate of return to make them worth investing in. If the Fed raises interest rates, the demand for loans will decrease, and therefore the rate of increase of the money supply via the banking system will decrease as less money will be pumped into the system. Basically if the 'public' demands more money from the system, the Fed will make sure that it gets there. But if the Fed raises rates sufficiently …show more content…

This is known as currency intervention, central bank intervention, or more informally as Forex market intervention. It is a monetary policy tool in which a central bank takes an active participatory role in influencing the monetary funds transfer rate of the national currency. Central banks, especially those in developing countries, intervene in the foreign exchange market in order to build reserves, stabilize the exchange rate and to correct …show more content…

They are Intervention, Operational, Concerted and Sterilized intervention. Intervention is known to be less complex and cheaper than any other type of intervention as foreign currency reserves are not disrupted during the process. Representatives of the central bank and the Ministry of Finance negotiate over a currency by ‘talking up’ or ‘down’ about it. Through this, they determine a currency to be over or under valued. The representatives can also use Operational intervention where concrete buying or selling of the currency takes place. Even though this form of intervention is considered a lot simpler than others, it is not however the most efficient and effective. Concerted intervention can also be verbal so that many representatives from varying countries can unify and discuss apprehensions over a currency that may be continuously fluctuating. Through Concerted intervention, nations unify to escalate or lower specific currencies with the use of their individual foreign currency reserves. The effectiveness and success of this type of intervention relies on the amount of nations involved and the overall amount of intervention (known as the breadth and depth). Sterilized Intervention involves a central bank using its monetary policy practices; doing so through adjusting its interest rate goals and its open market operations to intervene in the forex

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