We indicated a sterilized intervention refers to when a countrys central bank offsets any change in its
Question:
We indicated a sterilized intervention refers to when a country’s central bank offsets any change in its foreign asset position with an equal and opposite change in its domestic asset position.
Suppose the central bank of Japan has an inflow of US dollar denominated assets equal to $800M and it decides to sterilize this inflow. What does our 2-panel model of exchange rates suggest will happen to the value of the Japanese yen in terms of the dollar as a result of this operation? (Remark: this question requires a bit of thought on your part).
A. The yen will fall as Japanese bond prices will fall if the central bank sterilizes the inflow.
B. The yen will rise as Japanese interest rates rise if the central bank sterilizes the inflow.
C. The yen will fall as Japanese interest rates fall if the central banks sterilize the inflow.
D. The yen will not change but Japanese interest rates will rise if the central bank sterilizes the inflow.
E. The yen will not change, nor will Japanese interest rates, since the Japanese money supply does not change.