Definition of ‘Unsterilized foreign exchange intervention’
Unsterilized foreign exchange intervention is a method by which the monetary authorities try to influence the exchange rate of the country and its money supply. When there is less money in circulation, the Currency strengthens, because it is scarce. When more currency in circulation, the Currency is weakening, because it is huge. During unsterilized foreign exchange intervention, and the country will try to influence the currency strength by buying or selling the currency of that country. This is a passive approach to exchange rate fluctuations, and allows for fluctuations in the monetary base.
Breaking down the ‘Unsterilized foreign exchange intervention’
If the Central Bank buys the domestic currency by selling foreign assets, the money supply will shrink because it has removed domestic currency from the market; this is an example of a sterilized policy. Unsterilized policy allows for the foreign exchange markets to function without manipulation of the supply of currency; thus, the monetary base is allowed to change.