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Sterilized intervention is a strategy in which the effects of various types of foreign exchange transactions on a domestic currency are minimized by placing limitations ion the amount of that currency that is made available for exchange with foreign currencies. This approach is sometimes used as a means of preventing a currency from gaining additional strength and possibly damaging that nation’s export economy by discouraging trading that involves that currency. At times, this approach has proven successful and helped to turn around an undesirable economic state. At other times, the solution can do just the opposite, sometimes leading to an economic depression for the nation that issues the sterilized currency.
When used to best effect, sterilized intervention makes it possible to responsibly support exports in a manner that encourages the purchase of those exported goods and services by maintaining what is considered an equitable rate of exchange between the domestic currency and the currencies used by different international customers. Since the international clientele view the rate of exchange with that particular country favorably, they are much more likely to purchase those goods from exporters residing in that nation instead of purchasing goods from exporters who live in countries where the rate of exchange is less favorable. This means more income is generated for the nation that is utilizing sterilized intervention to stimulate exports, which in turn helps lead to a more stable economy.
There is always the possibility of abusing the concept of sterilized intervention. When this happens, there is a greater chance of the domestic currency falling in value on the foreign exchange market to the point that it becomes almost worthless. While this does encourage foreign clients to purchase goods produced in that nation, since they can receive considerably more product for less money, the strategy can eventually help create the foundation for a depression in the nation that is exporting so many of their products. There are those that believe the efforts of the United States to use sterilized intervention without imposing proper limitations on the strategy helped set the stage for the onset of the Great Depression of the 1930s.
When utilized 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 as the intervention helps to promote a healthy business volume in exports. This means constantly allowing for shifts in consumer demand, monitoring the rate of exchange of the domestic currency with other world currencies, and adjusting the nation’s monetary policy when and as needed, before undesirable circumstances have the opportunity to appear.
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