Working Paper: NBER ID: w16345
Authors: Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
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: Foreign Exchange Market; Intervention; Monetary Policy; Price Stability
JEL Codes: F3; N1; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve's foreign exchange interventions (F31) | uncertainty about commitment to price stability (E60) |
| uncertainty about commitment to price stability (E60) | undermining of credibility of monetary policy (E52) |
| US foreign exchange interventions (1981-1985) (F31) | significant dollar appreciation (F31) |
| US foreign exchange interventions (F31) | ineffective in achieving intended outcomes (L21) |
| dollar's movements (F31) | underlying monetary policy changes (E52) |
| Plaza and Louvre interventions (D52) | no lasting changes in exchange rates (F31) |