Central bank intervention and bond-financed budget deficits *

Since the early 1980s, central banks of the industrialized countries have come under increasing pressure to monitor their exchange rates as well as their domestic interest rates in formulating monetary policy. While the well-publicized meetings of central bankers have been hailed as positive moves by policy-makers, the results have been far from encouraging. Persistent and large current imbalances, coupled with excessive exchange-rate volatility, have generated substantial research attention concerning the efficacy of international macro-economic policy co-ordination.