Central Bank Operations in Foreign and Domestic Assets Under Fixed and Flexible Exchange Rates

Abstract

Under the Bretton Woods system, national authorities agreed to intervene in the exchange markets to keep exchange rates within narrow limits around pre-established and rarely altered par values. Foreign balances obtained in exchange market intervention were normally used to purcahse interest earning assets, mainly U.S. Treasury securities, although sizable amounts of reserves were held as hold and SDR's. These exchange market and reserve management operations were carried out along side conventional open market operations. While exchange market oerations were narrowly directed at preventing the exchange rate from moving outside its band, domestic open market operations were, depending on time and circumstances directed at operating targets, such as monetary aggregates or interst rates, in order to achieve desired values for primary targets such as price levels, incomes, or balance of payments. Under the recent, post Bretton Woods system of mixed fixed and floating exchagne rates, many central banks have continued to intervene in exchange markets, even when not obliged to do so by any international agreement.

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