U.S. Treasury Primacy in Monetary Policy Signaling: A Public Choice Perspective

15 Pages Posted: 8 Nov 2004

See all articles by Franklin G. Mixon

Franklin G. Mixon

University of Southern Mississippi

W. Charles Sawyer

University of Southern Mississippi - College of Business Administration

Date Written: November 4, 2004

Abstract

This note reviews the signaling models presented in the monetary economics literature, and offers a supplementary interpretation regarding the observed U.S. Treasury primacy in signaling. It is argued here that the legal authority given to the U.S. Treasury, under the Gold Reserve Act of 1934, for managing the exchange value of the dollar in international markets provides an avenue for the Treasury, and thus the Administration (i.e., the Executive Branch), to use foreign exchange intervention policy to reduce the credibility of the Federal Reserve's monetary policy. This legal relationship is likely the source of much tension between the two institutions, especially during periods for which the Administration and the Federal Reserve are at odds regarding the proper direction for monetary policy. Given that the Federal Reserve is aware of this implicit power of the Treasury, is should not be surprising that monetary policy signals from that quarter have been found to have a dominant influence on monetary policy.

Keywords: Central bank independence, monetary policy signaling

JEL Classification: E52, E58, F31

Suggested Citation

Mixon, Franklin G. and Sawyer, W. Charles, U.S. Treasury Primacy in Monetary Policy Signaling: A Public Choice Perspective (November 4, 2004). Available at SSRN: https://ssrn.com/abstract=615083 or http://dx.doi.org/10.2139/ssrn.615083

Franklin G. Mixon (Contact Author)

University of Southern Mississippi ( email )

Department of Economics Finance & International Law JGH 312E
Hattiesburg, MS 39406
(601) 266-5083 (Phone)

W. Charles Sawyer

University of Southern Mississippi - College of Business Administration ( email )

Hattiesburg, MS 39406
United States
601-266-4489 (Phone)
601-266-4410 (Fax)

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