Suppose a Central Bank sells $30 billion in foreign reserves to the non-bank public in return for $30 billion in currency from the non-bank public to try to bolster up a country's FX rate, show the Balance Sheet accounts for the Central Bank's asset and liabilities how this would be carried out with a sterilized foreign exchange intervention, so there will be $0 change in the monetary base of the country.

Question

Quizplus · Accepted Answer

The Answer is

\mathbf { ext {Central Bank}}

\begin{array}{l}\mathbf { ext { Assets: -} } \$ 30 ext { bil. Foreign Reserves} \quad \mathbf { ext { Liabilities:} } \quad ext { - } \$ 30 ext { bil. Currency } \\quad\quad\quad\quad+\$ 30 ext { bil. Securities } \quad\quad\quad\quad\quad\quad\quad\quad\quad+\$ 30 ext { bil. Currency } \\quad\quad\quad\quad ext { Change in Monetary Base } \$ 0 \\end{array}

This open market operation reduces the supply of international reserves in circulation, raising the value of foreign currency, and thus reducing the value of the currency for the domestic currency.
With the central bank selling foreign reserves to the non-bank public in return for currency, the currency in the country goes down by $30 billion. To offset this with a sterilized foreign intervention, the bank buys securities from the non-bank public putting $30 billion of currency back into circulation, resulting no change in the monetary base.

Suppose a Central Bank Sells $30 Billion in Foreign Reserves