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

63 Pages Posted: 12 Dec 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

Date Written: December 9, 2010

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 they 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.

Keywords: intervention, monetary policy, Great Inflation, swap lines, warehousing

JEL Classification: F3, N1, N2

Suggested Citation

Bordo, Michael D. and Humpage, Owen and Schwartz, Anna J., U.S. Intervention and the Early Dollar Float: 1973-1981 (December 9, 2010). FRB of Cleveland Working Paper No. 10-23. Available at SSRN: https://ssrn.com/abstract=1723446 or http://dx.doi.org/10.2139/ssrn.1723446

Michael D. Bordo

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

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Owen Humpage (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States

Anna J. Schwartz

City University of New York (CUNY) ( email )

17 Lexington Avenue
New York, NY 10010
United States

National Bureau of Economic Research (NBER) - NY Office

365 Fifth Avenue, 5th Floor
New York, NY 10016-4309
United States
212-817-7957 (Phone)

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