The Plaza Agreement: Exchange Rates and Policy Coordination

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The Ministers and Governors, noting the recent developments in the exchange markets, expressed their commitment to work toward greater exchange market stability. Toward this end, the Ministers and Governors:

• Reaffirmed their commitment to pursue monetary and fiscal policies that promote a convergence of economic performance at non-inflationary, steady growth.
• Stressed the importance of removing structural rigidities in their economies to achieving the objectives of non-inflationary steady growth and exchange market stability, and expressed their intent to intensify efforts in this area; and
• In light of recent developments in foreign exchange markets, reaffirmed their commitment made at the Williamsburg Summit to undertake coordinated intervention in the markets as necessary.

The Ministers and Governors believe that this approach will provide a solid framework for sustaining recovery, reducing inflation, increasing employment, and achieving greater exchange rate stability. Announcement of G-5 Ministers and Governors, January 17, 1985 (G-5,1985a)

In the 1980s and the early 1990s, international coordination of macroeconomic policies focused primarily on three interrelated topics: exchange rates, current account positions, and promotion of non-inflationary growth. The meeting of the G-5 ministers and governors on January 17, 1985 marked the start of a new period of activism for the group and later for the G-7 ministers and governors. For the first time they issued a statement. The G-7 leaders had met annually starting in November 1975 and issued statements, communiqués, and associated annexes and reports after each meeting. The G-5 finance ministers and central bank governors had met several times a year starting earlier in the 1970s, but they did not issue statements and often there was no publicity about their meetings.

The January 1985 G-5 announcement mentioned exchange markets and exchange market stability five times.  This was no accident. The statement was motivated by a desire to signal a willingness to support the British pound sterling, which had depreciated about 10 percent against the US dollar over the previous three months. Despite the Reagan administration’s general disapproval of foreign exchange market intervention, outgoing Treasury Secretary Donald Regan and incoming Secretary James Baker were prepared to help President Reagan’s good friend UK Prime Minister Margaret Thatcher with at least some verbal intervention in the context of continued concerns about global growth. Concerns about current account imbalances were soon to emerge as well.

In this paper, I cover three episodes of international economic policy coordination each focused in large part on exchange rates: (1) The 1983 report to the G-7 leaders of the working group on exchange market intervention, known as the Jurgensen Report; (2) the Plaza Agreement in September 1985; and (3) the closely linked Louvre Accord in 1987 which built on a surveillance framework established at the 1986 Tokyo G-7 leaders’ meeting. I conclude with a coda summarizing developments with respect to policy coordination on these topics from the late 1980s through the first 15 years of the 21st century.

I review each episode in terms of (a) the identification of the problem and the extent of consensus on its diagnosis; (b) treatment of the problem and the extent to which the parties followed through on their commitments and understandings, sometimes with adjustments; and (c) evaluation of these episodes in terms of their short-term and longer-term results.

To anticipate my conclusions: With respect to identification of the problem and its shared diagnosis in the Jurgensen episode, the issue of the effectiveness and appropriateness of exchange market intervention was identified quite promptly and the diagnosis, in so far as recognizing the possibility of commissioning a study, was generally shared. In the Plaza episode, the identification of the dollar’s super strength was recognized late and the diagnosis of its causes was not widely shared. The same was true for the Louvre episode involving the US dollar that, by early 1987, had depreciated too far and too fast.

On treatment, in the Jurgensen episode, the treatment was the report of the working group. In the Plaza episode, a small amount of intervention treatment was applied but that was all. In the Louvre episode, a large amount of intervention treatment was applied over a period of almost 12 months and in the end the United States made a small ad hoc adjustment in its budget plans.

My evaluation of the Jurgensen episode is that it had little short-run impact, but its longer-term impacts shaped thinking about intervention as a policy tool; intervention would be more likely to achieve its objectives if it was coordinated and was linked to support for, or to supporting, policy measures. The Plaza Agreement was successful in accelerating the decline of the dollar and forestalling US protection legislation, but on the former it overachieved, requiring a subsequent effort to try to stop the dollar’s decline in the Louvre Accord. Little was accomplished in terms of changes in G-7 macroeconomic policies. The Louvre Accord failed in its short-term objective to stabilize the dollar in the short run, though the intervention may have slowed the adjustment. With respect to macroeconomic policies, the process can be credited with eventually inducing a modest adjustment in the US budget deficit contributing positively to that multiyear process.

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