Sterilization (monetary policy)

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In the monetary policy of the central banks, an intervention in the foreign exchange market is called sterilized if, in contrast to unsterilized interventions, it does not result in any change in the domestic monetary base through appropriate accompanying measures . The transactions carried out to sterilize the intervention must therefore have an effect on the money supply that is contrary to the intervention in Germany .

For example, a central bank buys government bonds in the amount of X monetary units. It pays the government bonds with central bank money and thus increases the monetary base by X (an open market transaction). In order not to change the monetary base as far as possible ( sterilization ), the central bank must reduce the liquidity to the same extent (= X monetary units) in order not to increase the money supply. This can e.g. This can be done , for example, by selling other central bank bonds or by restricting normal lending to commercial banks.

Another example of sterilized intervention would be for the central bank to buy foreign securities and sell domestic securities at the same time, both in exchange for the domestic currency. This means that the domestic money supply remains constant, while the external currency depreciation occurs, which results from the changed supply and demand situation for domestic and foreign securities as a result of the intervention. A complete monetary policy decoupling cannot be achieved through sterilization, since the compensation affects the interest structure.

In addition to the specific effect on the exchange rate, sterilized interventions have a signal effect for the market, since investors, if the central bank has sufficient credibility, orient their behavior to its measures. This expectation aspect only has a temporary effect; in addition, in order to maintain credibility, care must be taken that the anticipated effect actually occurs, which can make further - then unsterilized - measures necessary.

It has not been scientifically proven that sterilized interventions are effective, as there is no way to determine with certainty how the foreign exchange market would have performed without intervention.

Partial sterilization during the euro crisis

During the euro crisis of 2008–2012, the European Central Bank (ECB) bought up government bonds on a large scale as part of the “Securities Markets Program” (SMP) . Between May 2010 and October 2011, the ECB bought almost 200 billion euros in government bonds from Greece, Portugal, Spain and Italy. However, these and subsequent monetary base increases were at least partially sterilized.

An article by Sebastian Dullien and Heike Joebges, who relies on data from the ECB on the central bank money supply, mentions a sterilization of around 50 percent of bond purchases from May 2010 to October 2011. In other words, the monetary base increases by 50% less than without countermeasures. It is not yet clear whether this will result in inflationary pressure, because the increase in the monetary base does not necessarily lead to an expansion of lending by the commercial banks.

Another bond purchase program is referred to by the ECB as “ Outright Monetary Transactions ” (OMT). It was announced on September 6, 2012. Here, bonds with a remaining term of between one and three years are to be acquired in an unlimited amount. Complete sterilization is guaranteed by withdrawing the additional liquidity elsewhere in the monetary system.

supporting documents

  1. ↑ Chair of Economics at Johannes Gutenberg University Mainz, Dieter Urban, lecture script SS2004
  2. ↑ Mussa, M., The Role of Official Intervention , Group of Thirty Occasional Papers No. 6th, 1981
  3. ↑ Wollmershäuser, Timo, Sterilized Foreign Exchange Market Interventions - A Controversial Currency Policy Instrument , Ifo Schnelldienst 56 (19), 2003, 34–44
  4. ^ A b c Sebastian Dullien and Heike Joebges: Do not be afraid of ECB purchases of government bonds. (PDF; 90 kB) November 2011. Accessed February 9, 2012.
  5. ↑ The ECB hardly ever buys bonds . February 7, 2012, Neue Zürcher Zeitung. Retrieved February 9, 2012.
  6. ^ Technical features of Outright Monetary Transactions . (English).
  7. ↑ faz.net November 6, 2012: "Neutralized liquidity - ECB withdraws 208.5 billion euros from the money market"