Abstract
This paper examines the impact of non sterilized and sterilized foreign exchange market operations on both the exchange rate and domestic interest rate within the context of a rational expectations portfolio balance model. The results show that non sterilized intervention will be more effective than sterilized intervention in affecting both the exchange rate and domestic interest rate. Both types of operations affect a market risk premium that is shown to be a function of relative asset supplies in the hands of the private sector. When domestic and foreign bonds are perfect substitutes, the risk premium vanishes and so to does the effectiveness of sterilized foreign exchange market interventions.
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