Working Paper: NBER ID: w10332
Authors: Michael P. Dooley; David Folkerts-Landau; Peter Garber
Abstract: In this paper we explore some implications of the revived' Bretton Woods system for exchange market intervention and reserve management in periphery countries. Financial policies in these countries are seen as a component of a more general portfolio management policy in which the formation of an efficient domestic capital stock is a key objective. Because intervention in financial markets is an important part of their development strategy, intervention in exchange and financial markets has, and we argue will continue to be, large and persistent enough to generate predictable deviations of exchange rates and relative yields in industrial country financial markets from normal cyclical patterns. We argue that management of the currency composition of international reserves by emerging market governments and central banks is unlikely to alter these conclusions.
Keywords: Bretton Woods; exchange rates; reserve management; interest rates; periphery intervention
JEL Codes: F02; F32; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reserve accumulations in periphery countries (F32) | finance current account deficits of center countries (F32) |
| finance current account deficits of center countries (F32) | lower real interest rates in center countries (E43) |
| reserve accumulations in periphery countries (F32) | lower real interest rates in center countries (E43) |
| concentration of reserves in short-term US Treasury obligations (E43) | depress yields on Treasuries relative to other financial instruments (E43) |
| continued foreign exchange intervention by Asian central banks (F31) | maintain low interest rates (E43) |
| reserve diversification away from the US dollar (F31) | conflict with development policy centered on export-led growth (O20) |
| reserve management choices (Q26) | macroeconomic stability in center countries (E63) |