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

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Listed:
  • 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.

Suggested Citation

  • Michael D. Bordo & Owen F. Humpage & Anna J. Schwartz, 2010. "U.S. Foreign-Exchange-Market Intervention and the Early Dollar Float: 1973 - 1981," NBER Working Papers 16647, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16647
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    File URL: http://www.nber.org/papers/w16647.pdf
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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, 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.
    3. repec:eee:reveco:v:51:y:2017:i:c:p:235-244 is not listed on IDEAS

    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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