@MrAntigone,
Quote:According to this article from November of 2013, Peru was purchasing USD to increase domestic inflation:
The article says:
"Peruvian central bankers don't want the sol to strengthen more because that could drive the inflation rate close to zero, curbing investment as business executives would worry demand is too weak to absorb more output,"
Quote:1) How does this work? Why would exchanging the Peruvian Sol for USD raise prices in Peru and decrease the value of the Sol?
Selling PEN drives it's price down, buying USD drives it's price up
Quote:Why does purchase of foreign currency increase domestic inflation?
A stronger PEN decreases the cost of imported goods (denominated in a foreign currency) leading to lower inflation, lower domestic investment and lower production. A weaker PEN has the opposite effect.
Quote: Wouldn't a decreased availability of Sol domestically raise the value of the Sol?
No, the amount of currency in the domestic system is unchanged.
Quote:2) If a central bank purchases a foreign currency of its own - assuming the Peruvian bank has the power to print fiat Soles just as the Fed prints dollars (is this correct?) - would the Peruvian bank be "purchasing" USD simply by 'printing' Soles? (I asked a similar question in another post...)
Yes, if the central bank did not have the PEN in it's own coffers already then it would print the money , deposit it in it's account and transfer the PEN to the counterparty in return for the USD into it's account.
Quote:3) If a bank has reserves of a foreign currency and the bank is in a fractional reserve banking system, is the bank able to lend its domestic currency at a fractional reserve ratio based on a foreign currency money-base?
Reserve accounts are denominated in the domestic currency (PEN).Commercial banks generally maintain minimum (fractional) statutory reserves to maximise lending.
http://en.wikipedia.org/wiki/Fractional_reserve_banking
Stumble It!
Tweet This
Bookmark on Delicious
Share on Facebook
Share on MySpace