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

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

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16345.

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Date of creation: Sep 2010
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Handle: RePEc:nbr:nberwo:16345
Note: DAE ME
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  1. Frankel, Jeffrey A & Rockett, Katharine E, 1988. "International Macroeconomic Policy Coordination When Policymakers Do Not Agree on the True Model," American Economic Review, American Economic Association, vol. 78(3), pages 318-40, June.
  2. Martin Feldstein, 1986. "New Evidence on the Effects of Exchange Rate Intervention," NBER Working Papers 2052, National Bureau of Economic Research, Inc.
  3. Mark Carlson, 2006. "A brief history of the 1987 stock market crash with a discussion of the Federal Reserve response," Finance and Economics Discussion Series 2007-13, Board of Governors of the Federal Reserve System (U.S.).
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