What Are The Interventions To Manage Exchange Rates?

Managing the exchange rate requires that government's intervene in foreign exchange markets. Government exchange rate intervention occurs when the government buys or sells its own or foreign currencies to affect exchange rates. For example the Japanese government on a given day might buy $1 billion worth of Japanese yen with U.S dollars. This would cause a rise in value, or an appreciation of the yen. In general a government intervenes when it believes its foreign exchange rate is out of lie with its currency's fundamental valu.

Here is where the new wrinkle appears: recall that Mexico is committed to maintaining the parity of $0.40 per peso. What can I do?One approach is to intervene by buying the depreciating currency and selling the appreciating currency. An alternative would be to use monetary policy. The Mexican central bank could induce the private sector to increase its demand for pesos by raising Mexican interest rates. These two operations are not really so different as they sound. In effect, both involve monetary policies in Mexico. I think this answer will satisfy your question.