[lbo-talk] Sterilization question

Marv Gandall marvgandall at videotron.ca
Tue Oct 12 04:34:17 PDT 2010


I'm not sure I understand Martin Wolf's reasoning in the October 5th Financial Times when he writes that "by sterilising the monetary effects, the Chinese government has also thwarted the mechanism of adjustment in a fixed-rate regime, which was explained by the great Scottish philosopher, David Hume, in the 18th century…" The effect of sterilization is to soak up excess yuan injected into the money supply when the Bank of China buys dollars. What "mechanism of adjustment" is being "thwarted" here? Failure to sterilize the dollar purchases would provoke inflation, requiring the BoC to hike interest rates, strengthening the yuan. This is what Wolf is driving at, yes?



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