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.


Log in;
  1. China corruption Isaac Lawrence/Getty Images

    The Next Battle in China’s War on Corruption

    • Chinese President Xi Jinping knows well the threat that corruption poses to the authority of the Communist Party of China and the state it controls. 
    • But moving beyond Xi's anti-corruption purge to build robust and lasting anti-graft institutions will not be easy, owing to enduring opportunities for bureaucratic capture.
  2. Italy unemployed demonstration SalvatoreEsposito/Barcroftimages / Barcroft Media via Getty Images

    Putting Europe’s Long-Term Unemployed Back to Work

    Across the European Union, millions of people who are willing and able to work have been unemployed for a year or longer, at great cost to social cohesion and political stability. If the EU is serious about stopping the rise of populism, it will need to do more to ensure that labor markets are working for everyone.

  3. Latin America market Federico Parra/Getty Images

    A Belt and Road for the Americas?

    In a time of global uncertainty, a vision of “made in the Americas” prosperity provides a unifying agenda for the continent. If implemented, the US could reassert its historical leadership among a group of countries that share its fundamental values, as well as an interest in inclusive economic growth and rising living standards.

  4. Startup office Mladlen Antonov/Getty Images

    How Best to Promote Research and Development

    Clearly, there is something appealing about a start-up-based innovation strategy: it feels democratic, accessible, and so California. But it is definitely not the only way to boost research and development, or even the main way, and it is certainly not the way most major innovations in the US came about during the twentieth century.

  5. Trump Trade speech Bill Pugliano/Getty Images .

    Preparing for the Trump Trade Wars

    In the first 11 months of his presidency, Donald Trump has failed to back up his words – or tweets – with action on a variety of fronts. But the rest of the world's governments, and particularly those in Asia and Europe, would be mistaken to assume that he won't follow through on his promised "America First" trade agenda.