Chapter 7: A cage for the dollar: the Plaza and Louvre Accords (1985-87)
7. A cage for the dollar: the Plaza and Louvre Accords (1985–87)* At the beginning of the 1980s, a number of economies – most notably the United States – had believed, not only that they need not listen to the IMF, but that they could ignore the market. They needed a shock of the kind that occurred in 1985 for the United States to shake them from their illusions. But now the disciplining mechanism was rather diﬀerent to that of the ‘classical’ Bretton Woods system. It turned out that an ability to adjust to what the market might do would best be secured through a measure of international cooperation. The result would be the creation of a more stable framework of expectations that might diminish the impact of the shocks in ﬁnancial markets caused by abrupt policy changes. Harold James (1996, p. 466) In the period from 1985 to 1987 the G7 devised and implemented an elaborate strategy for the international coordination of economic policies aimed at stabilizing the exchange rate of the dollar and adjusting the internal and external disequilibria that were hindering non-inﬂationary growth in the G7 countries. This strategy comprised two distinct phases: the ﬁrst, during 1985 (Plaza Accord), ended the excessive appreciation of the dollar and cleared the way for a period of signiﬁcant depreciation; the second, during 1987 (Louvre Accord), involved a concerted eﬀort ﬁrst to halt the dollar’s decline and then to stabilize it at a sustainable level. The birth of...
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