Background
The Plaza Accord represents a pivotal moment in international economic policy coordination. It was formulated in response to the overarching need for managing international currency values comprehensively to address the macroeconomic challenges faced by signatory countries.
Historical Context
The agreement was signed on September 22, 1985, at the Plaza Hotel in New York City, involving France, Japan, the United Kingdom, the United States, and West Germany. During this period, the United States was grappling with a substantial current account deficit, exacerbated by a strong US dollar. This strength made US exports expensive and less competitive internationally, contributing to the deficit and a lingering economic downturn.
Definitions and Concepts
Plaza Accord: An international agreement signed in 1985 by the United States, France, Japan, the United Kingdom, and West Germany to induce a managed depreciation of the US dollar against the Deutsche Mark (Germany’s currency at the time) and the Japanese Yen to alleviate the US current account deficit and invigorate the global economy.
Major Analytical Frameworks
Classical Economics
The Plaza Accord did not directly align with classical economics which emphasizes minimal government intervention. The coordinated intervention in currency markets and setting targets for exchange rate adjustments ran counter to classical laissez-faire principles.
Neoclassical Economics
The agreement can be seen through the lens of neoclassical economics where rational actors pursued policies understanding the benefits of coordinated action to correct misaligned exchange rates and unbalanced trade.
Keynesian Economics
The Plaza Accord resonates well with Keynesian thought which supports active policy measures, including fiscal and monetary interventions, to stabilize economies. The Accord’s objective of reducing the US current account deficit by altering exchange rates is Keynesian in spirit.
Marxian Economics
Indirectly relevant, as the Accord can be critiqued from a Marxian perspective for how international economic policies often favor more powerful economic states, possibly at the expense of labor in weaker economies.
Institutional Economics
This framework could analyze the Accord by considering how institutional rules, norms, and mechanisms facilitated a concerted action among nations to manage the global economic situation.
Behavioral Economics
Exploring the implications of coordinated policy declaration on market sentiments, and how psychological factors among investors may have been influenced by the perceived solidarity among leading economies.
Post-Keynesian Economics
Post-Keynesian view would assess the Accord in terms of systemic financial stability and the effective governmental role in managing macroeconomic demand through international cooperation.
Austrian Economics
However, Austrian Economics would likely critique the Accord for market manipulation and argue that such interventions distort natural market correctives, causing long-term inefficiencies.
Development Economics
This lens would focus on how the economic shifts resulting from the Accord impacted developing nations, either by altering trade patterns or through influence on global finance dynamics.
Monetarism
Monetarists would observe the impact on money supply and inflation rates, scrutinizing the effectiveness of controlled depreciation in managing macroeconomic stability and price levels.
Comparative Analysis
The subsequent Louvre Accord (1987) and the Plaza Accord are frequently compared in terms of their objectives, methodologies, and outcomes. The Louvre Accord was aimed at stabilizing the currencies following the significant depreciation from the Plaza Accord to halt any adverse economic consequences due to the rapid and sizeable currency adjustments.
Case Studies
Examining Japan and Germany post-Plaza Accord provides insights into how currency appreciation impacted their export competitiveness and domestic economic strategies. The successful immediate economic resurgence in the US also warrants close study.
Suggested Books for Further Studies
- “The Plaza Agreement and Japan: Reflection on the 30th Anniversary“ by Hiroshi Watanabe
- “The Political Economy of International Relations” by Robert Gilpin
- “Frontier of Revolution: Comparative Histories of Japan and the United States” by Eiichiro Azuma
Related Terms with Definitions
Louvre Accord: A 1987 agreement involving the Plaza Accord signatories and Canada aiming at stabilizing international currency values to prevent disorderly exchange rate movements post-Plaza Accord adjustment.
Current Account Deficit: A measurement of a trade imbalance where a nation’s imports exceed its exports, often requiring policy measures to correct and balance it.
Exchange Rate: The value of one currency for the purpose of conversion to another, critical in assessing international trade competitiveness.
