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The Case for a New Plaza Agreement

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Author Info

  • William R. Cline

    ()
    (Peterson Institute for International Economics)

Abstract

The United States is running an increasing risk by allowing its external current account deficit to rise to levels historically unprecedented for the United States and most other industrial countries. This trend can be arrested through a credible program to eliminate the US fiscal deficit by 2010 combined with an accord, like the Plaza Agreement of 1985, to achieve appreciation of a wide array of foreign currencies against the dollar. A Plaza II would help achieve global adjustment in three ways: First, it would resolve the "prisoner's dilemma" for major developing and newly industrialized economies, in which each country acts in isolation to stem a loss of competitiveness, leaving the world as a whole worse off. Second, it would provide a framework for coordinated intervention--dollar sales by the European Central Bank and Bank of Japan and purchases of euros, yen, and possibly other currencies by the Federal Reserve. Third, by including a program for US fiscal adjustment, a Plaza II would assure countries allowing their currencies to rise that the United States, too, was carrying its share of the adjustment burden.

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Bibliographic Info

Paper provided by Peterson Institute for International Economics in its series Policy Briefs with number PB05-04.

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Date of creation: Dec 2005
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Handle: RePEc:iie:pbrief:pb05-04

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Cited by:
  1. Rod Tyers & Iain Bain, 2007. "Appreciating the Renminbi," Departmental Working Papers 2007-09, The Australian National University, Arndt-Corden Department of Economics.
  2. Morris Goldstein & Nicholas Lardy, 2006. "China's Exchange Rate Policy Dilemma," American Economic Review, American Economic Association, vol. 96(2), pages 422-426, May.
  3. Schnabl, Gunther & Freitag, Stephan, 2009. "An asymmetry matrix in global current accounts," Working Papers 76, University of Leipzig, Faculty of Economics and Management Science.
  4. Kinkyo, Takuji, 2007. "Explaining Korea's Lower Investment Levels After the Crisis," World Development, Elsevier, vol. 35(7), pages 1120-1133, July.
  5. Gunther Schnabl & Christian Danne, 2007. "A Role Model for China? Exchange Rate Flexibility and Monetary Policy in Japan," CESifo Working Paper Series 2051, CESifo Group Munich.
  6. Kim, C., 2011. "Global balance and financial stability: twin objectives toward a resilient global economic system," Financial Stability Review, Banque de France, issue 15, pages 61-72, February.
  7. Eichengreen, Barry, 2006. "Global Imbalances and the Asian Economies: Implications for Regional Cooperation," Working Papers on Regional Economic Integration 4, Asian Development Bank.

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