The OeNB's Reaction to the End of the Bretton Woods System: Tracing the Roots of the Indicator

Abstract

In response to the end of the Bretton Woods system, the Oesterreichische Nationalbank (OeNB) aimed at keeping the value of the Austrian schilling stable vis-à-vis the currencies of the country’s main trading partners. The OeNB’s solution for achieving this objective was to introduce an internal target for the exchange rate between the Austrian schilling and the U.S. dollar (USD) based on a method called the Indicator. This paper investigates the origins of this Indicator. It finds that it was an ad hoc innovation developed by the OeNB during the days before August 25, 1971, in response to political opposition to its initial plans to revalue the Austrian schilling in line with the Deutsche mark and the Swiss franc only. The Indicator enabled the central bank to channel the political opposition into a technical debate and to make some concessions on details such as the composition of the currency basket. At the same time, it helped manufacture consent regarding the cornerstones of the new strategy, namely the stability of exchange rates vis-à-vis the main trading partners and a managed float vis-àvis the U.S. dollar. The OeNB thereby preserved the traditional consensus in Austrian Exchange rate policy, despite the fundamental shift from the traditional export-oriented to a stability-oriented exchange rate policy which took place in the early 1970s.

Keywords: Austrian economic history, monetary and exchange rate policy, Bretton Woods

JEL Classification: E40, N10