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Currency Intervention (Chain of Analysis)

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 21 Mar 2021

Here is a short revision video exploring a chain of reasoning to this question: Explain two ways in which a central bank can cause a currency depreciation.

Chains of Reasoning: Currency Intervention

Key Notes

  • Attempts by a central bank to cause a currency depreciation happens in a managed floating exchange rate system. A depreciation is a drop in the external value.
  • One policy is to cut interest rates. This is designed to cause an outflow of hot money from the banking system and an increase in currency flowing overseas seeking a better return.
  • Another intervention would be for the Central Bank to go directly into the foreign exchange market and sell your country’s own currency and buy foreign currencies.
  • This again leads to an increased market supply of the domestic currency and a fall in the exchange rate. One effect would be a rise in foreign currency reserves.

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