interventions by global central banks · interventions by global central banks peter coyne, john...
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Interventions By Global Central Banks
Peter Coyne, John Hunt, John Kenny
19th March, 2009
Foreign Exchange Intervention and theMoney Supply
Federal Reserve System
Assets Liabilities
Foreign Assets(inter- Currency innational reserves) -1billion circulation -1 billion
Foreign Exchange Intervention and theMoney Supply
Federal Reserve System
Assets Liabilities
Foreign Assets(inter- Deposits withnational reserves) -1billion the fed(reserves) -1 billion
Foreign Exchange Intervention and theMoney Supply
A central bank’s purchase of domestic currency and correspondingsale of foreign assets in the foreign exchange market leads to anequal decline in its international reserves and the monetary base.
A central bank’s sale of domestic currency to purchase foreignassets in the foreign exchange market results in an equal rise in itsinternational reserves and the monetary base.
Foreign Exchange Intervention and theMoney Supply
A central bank’s purchase of domestic currency and correspondingsale of foreign assets in the foreign exchange market leads to anequal decline in its international reserves and the monetary base.
A central bank’s sale of domestic currency to purchase foreignassets in the foreign exchange market results in an equal rise in itsinternational reserves and the monetary base.
Foreign Exchange Intervention and theMoney Supply
Federal Reserve System
Assets Liabilities
Foreign Assets(inter- Monetary basenational reserves) -1 billion (reserves) 0
Government bonds +1 billion
Unsterilized Intervention in the ForeignExchange Market
Unsterilized Intervention in the ForeignExchange Market
An unsterilized intervention in which domestic currency is sold topurchase foreign assets leads to a gain in international reserves, anincrease in the money supply, and a depreciation of the domesticcurrency.
An unsterilized intervention in which domestic currency ispurchased by selling foreign assets leads to a drop in internationalreserves, a decrease in the money supply, and an appreciation ofthe domestic currency
Sterilized Intervention in the ForeignExchange Market
The key point to remember about a sterilized intervention is thatthe central bank engages in offsetting open market operations, sothat there is no impact on the monetary base and the moneysupply.
The future change in monetary policy not the sterilizedintervention is the source of the exchange rate effect.
Actions by Global Central Banks
• Central banks keep a supply of most currencies in supply and willuse them to influence the exchange rate.
• Exchange rates are continuously changing, and it’s the central banksresponsibility to maintain stability in the foreign exchange market.
• Stability in the foreign exchange market is of great importance.
• Preventing large changes in the value of a currency makes it easierfor firms purchasing or selling goods abroad to plan ahead.
Actions by Global Central Banks
• Central banks keep a supply of most currencies in supply and willuse them to influence the exchange rate.
• Exchange rates are continuously changing, and it’s the central banksresponsibility to maintain stability in the foreign exchange market.
• Stability in the foreign exchange market is of great importance.
• Preventing large changes in the value of a currency makes it easierfor firms purchasing or selling goods abroad to plan ahead.
Actions by Global Central Banks
• Central banks keep a supply of most currencies in supply and willuse them to influence the exchange rate.
• Exchange rates are continuously changing, and it’s the central banksresponsibility to maintain stability in the foreign exchange market.
• Stability in the foreign exchange market is of great importance.
• Preventing large changes in the value of a currency makes it easierfor firms purchasing or selling goods abroad to plan ahead.
Actions by Global Central Banks
• Central banks keep a supply of most currencies in supply and willuse them to influence the exchange rate.
• Exchange rates are continuously changing, and it’s the central banksresponsibility to maintain stability in the foreign exchange market.
• Stability in the foreign exchange market is of great importance.
• Preventing large changes in the value of a currency makes it easierfor firms purchasing or selling goods abroad to plan ahead.
Actions by Global Central Banks
• Global central bank sets a target key interest rate.
• It can either increase or decrease this key rate.
• If a central bank decides to decrease(increase) this rate, it will causethe value of their currency to fall(rise) relative to other currencies.
• For example, if the Fed believes USD has appreciated in value toomuch relative to Yen, it will sell some of the USD in reserve and buysome Yen.
• Thus increasing the supply of dollars on the foreign exchange marketand decreasing the supply of Yen, resulting in a depreciation in thevalue of dollar relative to the Yen.
Actions by Global Central Banks
• Global central bank sets a target key interest rate.
• It can either increase or decrease this key rate.
• If a central bank decides to decrease(increase) this rate, it will causethe value of their currency to fall(rise) relative to other currencies.
• For example, if the Fed believes USD has appreciated in value toomuch relative to Yen, it will sell some of the USD in reserve and buysome Yen.
• Thus increasing the supply of dollars on the foreign exchange marketand decreasing the supply of Yen, resulting in a depreciation in thevalue of dollar relative to the Yen.
Actions by Global Central Banks
• Global central bank sets a target key interest rate.
• It can either increase or decrease this key rate.
• If a central bank decides to decrease(increase) this rate, it will causethe value of their currency to fall(rise) relative to other currencies.
• For example, if the Fed believes USD has appreciated in value toomuch relative to Yen, it will sell some of the USD in reserve and buysome Yen.
• Thus increasing the supply of dollars on the foreign exchange marketand decreasing the supply of Yen, resulting in a depreciation in thevalue of dollar relative to the Yen.
Actions by Global Central Banks
• Global central bank sets a target key interest rate.
• It can either increase or decrease this key rate.
• If a central bank decides to decrease(increase) this rate, it will causethe value of their currency to fall(rise) relative to other currencies.
• For example, if the Fed believes USD has appreciated in value toomuch relative to Yen, it will sell some of the USD in reserve and buysome Yen.
• Thus increasing the supply of dollars on the foreign exchange marketand decreasing the supply of Yen, resulting in a depreciation in thevalue of dollar relative to the Yen.
Actions by Global Central Banks
• Global central bank sets a target key interest rate.
• It can either increase or decrease this key rate.
• If a central bank decides to decrease(increase) this rate, it will causethe value of their currency to fall(rise) relative to other currencies.
• For example, if the Fed believes USD has appreciated in value toomuch relative to Yen, it will sell some of the USD in reserve and buysome Yen.
• Thus increasing the supply of dollars on the foreign exchange marketand decreasing the supply of Yen, resulting in a depreciation in thevalue of dollar relative to the Yen.
Actions by Global Central Banks
• In the past year central banks throughout the world have madechanges to their key interest rates in an attempt to jump start theirrespective economies.
• The Bank of Canada this month cut its rate to 0.5%, the seventhcut in the past year causing the Canadian dollar to depreciaterelative to other major currencies such as the USD, Euro and Yen.
• However in the past year the Canadian dollar has appreciatedrelative to GBP.
• On March 13th last year CAD/GBP = 0.5003, while on March 13thof this year CAD/GBP = 0.56114.
• The GBP has depreciated against the other worlds major currenciesdue to the fact the Bank of England has been cutting interest ratessteadily over past year.
Actions by Global Central Banks
• In the past year central banks throughout the world have madechanges to their key interest rates in an attempt to jump start theirrespective economies.
• The Bank of Canada this month cut its rate to 0.5%, the seventhcut in the past year causing the Canadian dollar to depreciaterelative to other major currencies such as the USD, Euro and Yen.
• However in the past year the Canadian dollar has appreciatedrelative to GBP.
• On March 13th last year CAD/GBP = 0.5003, while on March 13thof this year CAD/GBP = 0.56114.
• The GBP has depreciated against the other worlds major currenciesdue to the fact the Bank of England has been cutting interest ratessteadily over past year.
Actions by Global Central Banks
• In the past year central banks throughout the world have madechanges to their key interest rates in an attempt to jump start theirrespective economies.
• The Bank of Canada this month cut its rate to 0.5%, the seventhcut in the past year causing the Canadian dollar to depreciaterelative to other major currencies such as the USD, Euro and Yen.
• However in the past year the Canadian dollar has appreciatedrelative to GBP.
• On March 13th last year CAD/GBP = 0.5003, while on March 13thof this year CAD/GBP = 0.56114.
• The GBP has depreciated against the other worlds major currenciesdue to the fact the Bank of England has been cutting interest ratessteadily over past year.
Actions by Global Central Banks
• In the past year central banks throughout the world have madechanges to their key interest rates in an attempt to jump start theirrespective economies.
• The Bank of Canada this month cut its rate to 0.5%, the seventhcut in the past year causing the Canadian dollar to depreciaterelative to other major currencies such as the USD, Euro and Yen.
• However in the past year the Canadian dollar has appreciatedrelative to GBP.
• On March 13th last year CAD/GBP = 0.5003, while on March 13thof this year CAD/GBP = 0.56114.
• The GBP has depreciated against the other worlds major currenciesdue to the fact the Bank of England has been cutting interest ratessteadily over past year.
Actions by Global Central Banks
• In the past year central banks throughout the world have madechanges to their key interest rates in an attempt to jump start theirrespective economies.
• The Bank of Canada this month cut its rate to 0.5%, the seventhcut in the past year causing the Canadian dollar to depreciaterelative to other major currencies such as the USD, Euro and Yen.
• However in the past year the Canadian dollar has appreciatedrelative to GBP.
• On March 13th last year CAD/GBP = 0.5003, while on March 13thof this year CAD/GBP = 0.56114.
• The GBP has depreciated against the other worlds major currenciesdue to the fact the Bank of England has been cutting interest ratessteadily over past year.
Actions by Global Central Banks
Actions by Global Central Banks
Euro vs Dollar
• In July 2008, the ECB boosted its key rate to 4.25% while the Fedslashed interest rates.
• Causing the Euro to appreciate against the dollar.
• However since then the US slowdown spread over seas, so ECB andother foreign central banks needed to cut interest rates in anattempt to boost their ailing economies.
• As a result the dollar appreciated against the Euro, which we can seein the following diagram.
Actions by Global Central Banks
Euro vs Dollar
• In July 2008, the ECB boosted its key rate to 4.25% while the Fedslashed interest rates.
• Causing the Euro to appreciate against the dollar.
• However since then the US slowdown spread over seas, so ECB andother foreign central banks needed to cut interest rates in anattempt to boost their ailing economies.
• As a result the dollar appreciated against the Euro, which we can seein the following diagram.
Actions by Global Central Banks
Euro vs Dollar
• In July 2008, the ECB boosted its key rate to 4.25% while the Fedslashed interest rates.
• Causing the Euro to appreciate against the dollar.
• However since then the US slowdown spread over seas, so ECB andother foreign central banks needed to cut interest rates in anattempt to boost their ailing economies.
• As a result the dollar appreciated against the Euro, which we can seein the following diagram.
Actions by Global Central Banks
Euro vs Dollar
• In July 2008, the ECB boosted its key rate to 4.25% while the Fedslashed interest rates.
• Causing the Euro to appreciate against the dollar.
• However since then the US slowdown spread over seas, so ECB andother foreign central banks needed to cut interest rates in anattempt to boost their ailing economies.
• As a result the dollar appreciated against the Euro, which we can seein the following diagram.
Actions by Global Central Banks
Actions by Global Central Banks
Euro vs Pound
• Up until November 2008 the EUR/GBP exchange rate was relativelystable.
• However on November 6th the BoE cut key interest rates by a huge1.5% to 3%.
• Resulting in a depreciation against the Euro.
• BoE continued reducing the key interest rate for the rest of the year,causing the GBP to depreciate against all major currencies.
Actions by Global Central Banks
Euro vs Pound
• Up until November 2008 the EUR/GBP exchange rate was relativelystable.
• However on November 6th the BoE cut key interest rates by a huge1.5% to 3%.
• Resulting in a depreciation against the Euro.
• BoE continued reducing the key interest rate for the rest of the year,causing the GBP to depreciate against all major currencies.
Actions by Global Central Banks
Euro vs Pound
• Up until November 2008 the EUR/GBP exchange rate was relativelystable.
• However on November 6th the BoE cut key interest rates by a huge1.5% to 3%.
• Resulting in a depreciation against the Euro.
• BoE continued reducing the key interest rate for the rest of the year,causing the GBP to depreciate against all major currencies.
Actions by Global Central Banks
Euro vs Pound
• Up until November 2008 the EUR/GBP exchange rate was relativelystable.
• However on November 6th the BoE cut key interest rates by a huge1.5% to 3%.
• Resulting in a depreciation against the Euro.
• BoE continued reducing the key interest rate for the rest of the year,causing the GBP to depreciate against all major currencies.
Actions by Global Central Banks
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