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U.S. Foreign-Exchange-Market Intervention and the Early Dollar Float: 1973 – 1981

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  • Michael D. Bordo
  • Owen F. Humpage
  • Anna J. Schwartz

Abstract

The dollar’s depreciation during the early floating rate period, 1973 – 1981, was a symptom of the Great Inflation. In that environment, sterilized foreign exchange interventions were ineffective in halting the dollar’s decline, but showed a limited ability to smooth dollar movements. Only after the Volcker FOMC changed its monetary-policy approach and demonstrated a willingness to maintain a disinflationary stance despite severe economic weakness and high unemployment did the dollar begin a sustained appreciation. Also contributing to the ineffectiveness of the interventions was the Desk’s method of operation. The small, covert interventions, particularly prior to 1977, seemed inconsistent with an expectations channel of influence, and financing intervention with short-term borrowed funds seemed inconsistent with a portfolio-balance channel of influence. The Desk never clearly articulated an intervention transmission mechanism. The episode indicated the shortcomings of sterilized intervention and led to their cessation in April 1981.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16647.

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Date of creation: Dec 2010
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Handle: RePEc:nbr:nberwo:16647

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  1. Michael D. Bordo & Barry Eichengreen, 2008. "Bretton Woods and the Great Inflation," NBER Working Papers 14532, National Bureau of Economic Research, Inc.
  2. Edwin M. Truman, 2005. "Reflections," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 353-358.
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Cited by:
  1. Michael D. Bordo & Owen F. Humpage & Anna J. Schwartz, 2012. "Bretton Woods, swap lines, and the Federal Reserve’s return to intervention," Working Paper 1232, Federal Reserve Bank of Cleveland.
  2. Michael D. Bordo & Owen F. Humpage & Anna J. Schwartz, 2011. "The Federal Reserve as an Informed Foreign Exchange Trader: 1973 – 1995," NBER Working Papers 17425, National Bureau of Economic Research, Inc.

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