Senior Fellow, Peterson Institute for International Economics
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The Plaza Agreement of September 1985 marked the beginning of global coordinated efforts to manage exchange rates in the floating exchange rate era. Plaza involved much more than intervention in foreign exchange markets, but that was a major element in the public’s eye and it is the focus of this paper.
Many economists and officials were, and remain, skeptical that intervention can have significant sustained effects on exchange rates and current account balances. The evidence of the 1980s does not refute that skepticism. However, the experience of the past 15 years shows that intervention can have important sustained effects if it is large enough. A number of countries—most notably China—have used massive and sustained intervention to hold their currencies down (sometimes in conjunction with other policies) and maintain large current account surpluses for years at a time.
At the time of the Plaza Agreement, the issue was what officials could or should do when they believed that private markets had mispriced foreign exchange rates. Although that potential problem remains, a new problem has arisen: what should officials in some countries do when officials in other countries cause substantial exchange rate misalignments and trade imbalances? A further complication is that the original parties to the Plaza Agreement do not dominate the global economy as they did in the 1980s; emerging and developing economies are increasingly important. The new global steering group is the G‐20, but it is in danger of becoming irrelevant because it is unwieldy and lethargic. Now more than ever, we need forceful global rules on currency management.
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