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U.S. foreign-exchange-market intervention during the Volcker-Greenspan era

Michael Bordo (), Owen Humpage and Anna Schwartz

No 1007, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: The Federal Reserve abandoned foreign-exchange-market intervention because it conflicted with the System’s commitment to price stability. By the early 1980s, economists generally concluded that, absent a portfolio-balance channel, sterilized foreign-exchange-market intervention did not provide central banks with a mechanism for systematically influencing exchange rates independent of their monetary policies. If intervention were to have anything other than a fleeting, hit-or-miss effect on exchange rates, monetary policy had to support it. Exchange rates, however, often responded to U.S. monetary-policy initiatives, so intervention to offset or reverse those exchange-rate responses can seem a contrary policy move and can create uncertainty about the strength of the System's commitment to price stability. That the U.S. Treasury maintained primary responsibility for foreign-exchange intervention only compounded this uncertainty. In addition, many FOMC participants feared that swap drawings and warehousing could contravene the Congressional appropriations process and, therefore, potentially pose a threat to System independence, a necessary condition for monetary-policy credibility.

Keywords: Banks and banking; Central; Foreign exchange administration; Monetary policy; Federal Open Market Committee (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-his, nep-ifn and nep-mon
Date: 2010
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