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

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

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.

Suggested Citation

  • Michael D. Bordo & Owen F. Humpage & Anna J. Schwartz, 2010. "U.S. Foreign-Exchange-Market Intervention during the Volcker-Greenspan Era," NBER Working Papers 16345, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16345 Note: DAE ME
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    References listed on IDEAS

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    1. Martin Feldstein, 1986. "New Evidence on the Effects of Exchange Rate Intervention," NBER Working Papers 2052, National Bureau of Economic Research, Inc.
    2. Michael Bordo & Anna Schwartz, 1991. "What has foreign exchange market intervention since the Plaza Agreement accomplished?," Open Economies Review, Springer, vol. 2(1), pages 39-64, February.
    3. Mark A. 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.).
    4. 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 318-340, June.
    5. Michael L. Bagshaw & Owen F. Humpage, 1986. "Intervention, exchange-rate volatility, and the stable paretian distribution," Working Paper 8608, Federal Reserve Bank of Cleveland.
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    Citations

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    Cited by:

    1. Owen F. Humpage & Sanchita Mukherjee, 2013. "Even keel and the Great Inflation," Working Paper 1315, Federal Reserve Bank of Cleveland.
    2. Robert G. King, 2012. "Central Banking in an Open Economy," International Journal of Central Banking, International Journal of Central Banking, vol. 8(1), pages 167-178, March.
    3. Michael D. Bordo & Owen F. Humpage & Anna J. Schwartz, 2012. "The Federal Reserve as an Informed Foreign Exchange Trader: 1973–1995," International Journal of Central Banking, International Journal of Central Banking, vol. 8(1), pages 127-160, March.
    4. Ronald McDonald & Xuxin Mao, 2016. "Japan's Currency Intervention Regimes: A Microstructural Analysis with Speculation and Sentiment," Working Papers 2016_06, Business School - Economics, University of Glasgow.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations
    • N2 - Economic History - - Financial Markets and Institutions

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