Q. What is the policy of sterilization? Give an example.

Answer:

• Untainted foreign exchange intervention - policy by which central banks perform equal foreign and domestic asset transactions in opposite directions to invalidate the impact of foreign exchange operations on domestic money supply.

• Illustration Bank of Pecunia sells $100 in foreign assets receives $100 check from PecuniaCorp and the Central foreign liabilities and assets decline simultaneously by $100 fall in money supply.

• To undo effect on money supply central bank buys $100 of domestic assets. This amplifies its domestic assets and its liabilities by $100 offsetting the money supply effect of sale of foreign assets.