Sterilized intervention limits the amount of domestic currency available for exchange to prevent it from gaining strength and hurting exports. When used responsibly, it can stimulate exports and contribute to a stable economy, but abuse can lead to a currency’s devaluation and economic depression. Careful monitoring and adjustment of monetary policy are necessary for success.
Sterilized intervention is a strategy in which the effects of various types of foreign currency transactions on a domestic currency are minimized by placing limitations on the amount of that currency that is made available for exchange for foreign currencies. This approach is sometimes used as a means of preventing a currency from gaining further strength and possibly hurting that nation’s export economy by discouraging trade involving that currency. At times, this approach has proven effective and has helped reverse an undesirable economic state. Other times, the solution can do just the opposite, sometimes leading to an economic depression for the nation issuing the sterilized currency.
When used to best effect, sterilized intervention makes it possible to responsibly support exports so as to encourage the purchase of those exported goods and services while maintaining what is considered a fair exchange rate between the domestic currency and the currencies used by several international clients. Since international customers view the exchange rate with that particular country favorably, they are much more likely to buy those goods from exporters residing in that country rather than buying goods from exporters living in countries where the exchange rate is less favourable. This means that more income is generated for the nation using sterilized interventions to stimulate exports which in turn contributes to a more stable economy.
There is always the possibility of abusing the concept of a sterilized intervention. When this happens, there is a greater chance that the domestic currency will fall in value on the foreign exchange market to the point where it is almost worthless. While this encourages foreign customers to buy goods made in that nation, since they can get considerably more products for less money, the strategy may eventually help create the basis for a depression in the nation that is exporting so much of their products. There are those who believe that US efforts to use sterilized intervention without imposing adequate limitations on strategy helped set the stage for the onset of the Great Depression of the 1930s.
When used in moderation and carefully controlled, sterilized intervention can be a very positive means of stimulating an economy. Care must be taken to consider all economic factors, in order to minimize any negative impact on other areas of the business community, even if the intervention helps to promote healthy export business. This means constantly allowing for changes in consumer demand, monitoring the domestic currency’s exchange rate against other world currencies, and adjusting the nation’s monetary policy as and when necessary, before undesirable circumstances appear.
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