This paper provides new evidence on the issue of Federal Reserve System credibility by examining the response pattern of asset prices to the weekly M1 announcements.
Many economists and policy makers have argued that the industrialized countries could minimize exchange-rate volatility and enhance economic stability if West Germany, Japan, and the United States linked their currencies in a target zone arrangement.
In recent years, growing dissatisfaction with the levels and the volatility of dollar exchange rates has led to calls for greater coordination of economic policies among nations and for an investigation into alternative exchange-rate systems.
The dollar’s rapid appreciation in foreign-exchange markets between mid- 1980 and February 1985 greatly reduced the international competitiveness of many U.S. industries.
Since mid-1980, the dollar has experienced an unprecedented appreciation in foreign-exchange markets. On a trade-weighted basis, the dollar appreciated 77 percent from its low in mid- 1980 to its most recent peak in February 1985.
There’s been growing dissatisfaction with the current system of managed floating exchange rates, leading a small but increasing number of economists, policymakers, and journalists to call for a return to a system of limited exchange-rate flexibility.
