US Treasury primacy in monetary policy signalling: a public choice perspective

This note reviews the signalling models presented in the monetary economics literature, and offers a supplementary interpretation regarding the observed US Treasury primacy in signalling. It is argued here that the legal authority given to the US Treasury, under the Gold Reserve Act of 1934, for managing the exchange value of the dollar in international markets provides an avenue for the Treasury, and thus the Administration (i.e., the Executive Branch), to use foreign exchange intervention policy to reduce the credibility of the Federal Reserve's monetary policy. This legal relationship is likely the source of much tension between the two institutions, especially during periods for which the Administration and the Federal Reserve are at odds regarding the proper direction for monetary policy. Given that the Federal Reserve is aware of this implicit power of the Treasury, it should not be surprising that monetary policy signals from that quarter have been found to have a dominant influence on monetary policy.