Can Central Banks Still Influence Exchange Rates?

For almost two decades, ever since George Soros forced the Bank of England to abandon its exchange-rate target for sterling, conventional wisdom has held that countries’ monetary policy should focus on domestic price stability while letting exchange rates float freely. But that wisdom is now being challenged.

LONDON – On September 16, 1992, a date that lives in infamy in the United Kingdom as “Black Wednesday,” the Bank of England abandoned its efforts to keep the British pound within its permitted band in the European exchange-rate mechanism. Supporting sterling at the required exchange rate had proved prohibitively expensive for the Bank and the British government. By contrast, it proved highly remunerative for George Soros. 

Since then, the Bank of England has eschewed all forms of intervention in the foreign-exchange markets. And the episode served to reinforce an international consensus that countries’ monetary policy should focus on domestic price stability while letting exchange rates float freely.

After Black Wednesday, it became conventional wisdom that it was simply impossible to fix both the exchange rate and domestic monetary conditions at the same time. According to this view, in a market economy with a convertible currency and free capital flows, the exchange rate cannot be manipulated without consequent adjustments to other dimensions of monetary conditions. Seeking to influence exchange rates using capital controls or direct intervention in currency markets was doomed to failure in anything other than the shortest term.

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.

required

Log in

http://prosyn.org/1qe95AO;
  1. An employee works at a chemical fiber weaving company VCG/Getty Images

    China in the Lead?

    For four decades, China has achieved unprecedented economic growth under a centralized, authoritarian political system, far outpacing growth in the Western liberal democracies. So, is Chinese President Xi Jinping right to double down on authoritarianism, and is the “China model” truly a viable rival to Western-style democratic capitalism?

  2. The assembly line at Ford Bill Pugliano/Getty Images

    Whither the Multilateral Trading System?

    The global economy today is dominated by three major players – China, the EU, and the US – with roughly equal trading volumes and limited incentive to fight for the rules-based global trading system. With cooperation unlikely, the world should prepare itself for the erosion of the World Trade Organization.

  3. Donald Trump Saul Loeb/Getty Images

    The Globalization of Our Discontent

    Globalization, which was supposed to benefit developed and developing countries alike, is now reviled almost everywhere, as the political backlash in Europe and the US has shown. The challenge is to minimize the risk that the backlash will intensify, and that starts by understanding – and avoiding – past mistakes.

  4. A general view of the Corn Market in the City of Manchester Christopher Furlong/Getty Images

    A Better British Story

    Despite all of the doom and gloom over the United Kingdom's impending withdrawal from the European Union, key manufacturing indicators are at their highest levels in four years, and the mood for investment may be improving. While parts of the UK are certainly weakening economically, others may finally be overcoming longstanding challenges.

  5. UK supermarket Waring Abbott/Getty Images

    The UK’s Multilateral Trade Future

    With Brexit looming, the UK has no choice but to redesign its future trading relationships. As a major producer of sophisticated components, its long-term trade strategy should focus on gaining deep and unfettered access to integrated cross-border supply chains – and that means adopting a multilateral approach.

  6. The Year Ahead 2018

    The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.

    Order now