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

64 Pages Posted: 11 Aug 2010 Last revised: 28 Aug 2010

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Owen Humpage

Federal Reserve Bank of Cleveland

Anna J. Schwartz

City University of New York (CUNY); National Bureau of Economic Research (NBER) - NY Office

Multiple version iconThere are 2 versions of this paper

Date Written: July 11, 2010

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.

Keywords: central-bank independence, intervention, Mexican peso crisis, monetary policy, swap lines, warehousing

JEL Classification: F3, N1, N2

Suggested Citation

Bordo, Michael D. and Humpage, Owen and Schwartz, Anna J., U.S. Foreign-Exchange-Market Intervention During the Volcker-Greenspan Era (July 11, 2010). FRB of Cleveland Working Paper No. 10-07. Available at SSRN: https://ssrn.com/abstract=1657175 or http://dx.doi.org/10.2139/ssrn.1657175

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
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National Bureau of Economic Research (NBER) ( email )

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Owen Humpage

Federal Reserve Bank of Cleveland ( email )

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Cleveland, OH 44101-1387
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Anna J. Schwartz

City University of New York (CUNY) ( email )

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New York, NY 10010
United States

National Bureau of Economic Research (NBER) - NY Office

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New York, NY 10016-4309
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