Managing International Financial Instability
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Managing International Financial Instability

National Tamers versus Global Tigers

Fabrizio Saccomanni

Recurrent instability has characterized the global financial system since the 1980s, eventually leading to the current global financial crisis. This instability and the resultant disruptions – sovereign debt defaults, exchange rate misalignments, financial market illiquidity and asset price bubbles – are linked, in this book, to the shortcomings of the global financial system which tends to generate cycles of boom and bust in credit flows. These cycles are set in motion by the monetary impulses of major industrial countries and are amplified and propagated through the operation of global financial markets. Fabrizio Saccomanni argues that to counter such systemic instability requires that national authorities give adequate weight to financial stability objectives when formulating their monetary and regulatory policies. He maintains that appropriate multilateral strategies to deal with unsustainable trends in credit aggregates and asset prices should be devised in the International Monetary Fund in the context of a strengthened framework to deal with global payments imbalances and exchange rate misalignments.
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Chapter 7: A cage for the dollar: the Plaza and Louvre Accords (1985-87)

Fabrizio Saccomanni


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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