Sterilization

Intervention in the currency markets that leaves domestic money supply unchanged.

For example, to weaken the Mexican peso, the Mexican central bank buys dollars and sells pesos in the financial market. That policy increases the supply of pesos and leads to lower interest rates. To reverse the decrease in interest rates, the Mexican central bank sells Treasury bills in the financial market and receives pesos. The amount of pesos in the economy declines and interest rates come back up.