Question

Explain the difference between sterilized and unsterilized intervention

Answer 1

Sterilized intervention is done to make sure that no change is made to the money supply.  In this case, the short-term interest rate is not impacted by the intervention.

Non-sterilized intervention is performed without being concerned about maintaining the same supply of money throughout. The short-term interest rate is impacted as a result of the intervention in this case.

Answer 2

Intervention is a term that is used to to describe a central banks' purchase or sale of foreign exchange in the market in order to influence the exchange rate.

Sterilized intervention does not influence the exchange rate via an interest rate channel, but it may have a signal effect as well as potential effect by the changes in the portfolio composition of the private sector.

Unsterillized intervention on the other side may impact the exchange rate through various channel, It may work through the interest rate channel.

 But also it works via the signal that the intervention gives about future monetary and exchange rate policy.