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March/April 1988, 
Vol. 70, No. 2
Posted 1988-03-01

The FOMC in 1987: The Effects of a Falling Dollar and the Stock Market Collapse

by R. W. Hafer and Joseph H. Haslag

R. W. Hafer and Joseph H. Haslag examine the factors that influenced the setting of monetary policy by the Federal Open Market Committee (FOMC) during 1987. In “The FOMC in 1987: The Effects of a Falling Dollar and the Stock Market Collapse,” the authors note that exchange rate developments played an important role in monetary policymaking decisions during the first 10 months of the year. This is because the decline in the value of the dollar in foreign exchange markets was expected to lead to a reduction in the U.S. trade deficit and encourage the foreign purchase of domestically produced goods. At the same time, however, the falling value of the dollar would increase prices paid by U.S. residents for imported goods, possibly affecting the price of domestically produced goods and raising the specter of higher rates of inflation. The changing value of the dollar played a lesser role in policy decisions with the stock market crash of October 19. The unprecedented fall in the stock market caused the FOMC to focus its energies on the uncertainty that prevailed in domestic financial markets and the immediate liquidity needs of the economy. Against the backdrop of the effects of the dollar’s falling value, the FOMC faced the increased possibility that the economy would slow dramatically following the tremendous wealth loss associated with the stock market plunge. To understand the impact that these and other events had throughout 1987, Hafer and Haslag review both long-run and short-run policy discussions by the FOMC. These discussions are set in the changing economic environment in which policy decisions were made.

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