Mary and Robert Raymond Professor and the George P. Shultz Senior Fellow in Economics, Stanford University
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This paper draws on lessons from the Plaza Accord of 1985 and the three decades of economic policy and performance that followed. For nearly two decades following the Plaza Accord economic performance and stability improved in major parts of the world—a period known as the Great Moderation or simply as NICE (for non-inflationary consistently expansionary)—as monetary policy tended to be more focused and rules-based. However, during much of the past decade monetary policy has deviated from a rules-based approach and economic performance and stability has deteriorated, remaining poor today. As Paul Volcker (2014) has put it “the absence of an official, rules-based, cooperatively managed monetary system has not been a great success.”
Accordingly, this paper proposes a new approach to international monetary policy. The experience of the past thirty years and basic economic reasoning suggest that a rules-based reform in each country will deliver performance akin to a cooperatively -managed international monetary system and “can better reconcile reasonably free and open markets with independent national policies [and] stability,” the sensible goal called for by Volcker (2014).
I start with a review of key lessons from the Plaza Accord which are most relevant for the future of the international monetary system. Next I review the economic principles that indicate that such a rules-based policy will lead to good global economic performance. I then provide evidence consistent with those principles: adhering to more rules-based policy has been associated with good performance while deviating from rules-based policy has been associated with poor economic performance. Building on this experience and the principles, I then describe the reform proposal and its implementation.
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