The value of the pound is rising and intervention occurs on the foreign exchange markets to prevent it.  Will this affect the money supply?

Expert Answers

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This depends on whether the government tries to "sterlize" its intervention into the foreign exchange market.  The government's attempt to lower the value of the pound could well increase the money supply, but governments often take steps to avoid this.

When the government sells pounds to lower the value of the pound, it creates reserves in banks.  This would increase the money supply.  However, the government may want to prevent this from happening.  If that is the case, it can take other actions, like selling government securities, that will remove money from the economy and prevent the money supply from increasing.

So, if the government simply sells pounds to prevent the value of the pound from increasing, it would increase the money supply.  But it could act to prevent that from happening.

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