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Strained RelationsUS Foreign-Exchange Operations and Monetary Policy in the Twentieth Century$
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Michael D. Bordo, Owen F. Humpage, and Anna J. Schwartz

Print publication date: 2015

Print ISBN-13: 9780226051482

Published to Chicago Scholarship Online: September 2015

DOI: 10.7208/chicago/9780226051512.001.0001

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PRINTED FROM CHICAGO SCHOLARSHIP ONLINE (www.chicago.universitypressscholarship.com). (c) Copyright University of Chicago Press, 2020. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in CHSO for personal use.date: 19 February 2020

US Intervention and the Early Dollar Float, 1973–1981

US Intervention and the Early Dollar Float, 1973–1981

(p.210) 5 US Intervention and the Early Dollar Float, 1973–1981
Strained Relations

Michael D. Bordo

Owen F. Humpage

Anna J. Schwartz

University of Chicago Press

Although monetary authorities accepted floating exchange rates after 1973, they viewed the market as inherently prone to bouts of disorder. Intervention, they contended, could reduce volatility and keep rates consistent with fundamentals without interfering with monetary policy. The prevailing paradigm was the portfolio-balance model, but the Federal Reserve’s trading desk did not act in a manner consistent with that model. In this chapter, wedescribe the early U.S. intervention episodes in detail and test their effectiveness. The dollar continued to depreciate until Volcker convincingly changed U.S. monetarypolicy after 1979. Wealso explain why the Federal Reserve stopped financing its interventions through swap lines and the Federal Reserve’s “warehousing” operations with the US Treasury. The chapter ends with the Treasury’s decision to suspend its active approach to exchange-rate management.

Keywords:   Carter bonds, Great Inflation, swap lines, portfolio-balance model, warehousing

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