Because the available stocks of dol lar and mark

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dollars, a procedure known as intervention. Because the available stocks of dol- lar and mark bonds are so large, it is unlikely that sterilized intervention in the dollar/mark market, even if carried out by the two most economically in²uen- tial members of the European Community³ Britain and West Germany³ would have much e/ect. The reason is that sterilized intervention changes only relative bond supplies and leaves national money supplies unchanged. Intervention by the United States and Germany that was not sterilized, however, would a/ect those countries´money supplies and have a signiµcant impact on the dollar/mark rate. Economists believe that the direct in²uence of sterilized intervention on exchange 1
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rates is small compared with that of nonsterilized intervention. Even sterilized intervention can a/ect exchange rates, however, through its indirect in²uence on market expectations about future policies. Such psychological e/ects, which can result from just the stated intention of the Community´s central banks to in- tervene, can disrupt the market by confusing traders about o¢ cial plans. The signaling e/ect of intervention is most likely to beneµt the authorities when their other macroeconomic policies are already being adjusted to push the exchange rate in the desired direction. 2. Problem 6, Chapter 17 in KO, 8th edition.
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