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U.S. Foreign-Exchange-Market Intervention during the Volcker-Greenspan Era

Michael Bordo (), Owen Humpage and Anna Schwartz

No 16345, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F3 N1 N2 (search for similar items in EconPapers)
Date: 2010-09
Note: DAE ME
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