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Managing the Dollar: Has the Plaza Agreement Mattered?

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  • Klein, Michael
  • Mizrach, Bruce
  • Murphy, Robert G

Abstract

This paper considers whether the Plaza Agreement of September 1985 marked the beginning of a fundamental shift in the exchange-rate policy regime for the United States, the former West Germany, and Japan. The paper uses a simple monetary model of the open economy to illustrate how the exchange rate responses to news about the trade balance when the government authorities gear policy toward resolving external imbalances. The paper finds that U.S. dollars exchange rates against the Japanese yen and the West German mark respond strongly to news about the U.S. trade deficit during the period following the Plaza Agreement but not during the period preceding the Agreement. This evidence, evaluated in the context of the simple model, suggests that the Plaza Agreement marked a significant shift toward more active government management of exchange rates. Copyright 1991 by Ohio State University Press.

Suggested Citation

  • Klein, Michael & Mizrach, Bruce & Murphy, Robert G, 1991. "Managing the Dollar: Has the Plaza Agreement Mattered?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(4), pages 742-751, November.
  • Handle: RePEc:mcb:jmoncb:v:23:y:1991:i:4:p:742-51
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    Cited by:

    1. Andrea Fracasso & Stefano Schiavo, 2009. "Trade-imbalances networks and exchange rate adjustments: the paradox of a new Plaza. The XIVth Spring Meeting of Young Economists (SMYE-2009), Istanbul, April 2009," Post-Print hal-01053278, HAL.
    2. repec:wsi:wschap:9789813148543_0014 is not listed on IDEAS
    3. Linda S. Goldberg & Michael W. Klein, 2005. "Establishing Credibility: Evolving Perceptions of the European Central Bank," NBER Working Papers 11792, National Bureau of Economic Research, Inc.
    4. Martin D. D. Evans & Richard K. Lyons, 2017. "How is Macro News Transmitted to Exchange Rates?," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 14, pages 547-596 World Scientific Publishing Co. Pte. Ltd..
    5. Savaser, Tanseli, 2011. "Exchange rate response to macronews: Through the lens of microstructure," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(1), pages 107-126, February.
    6. Fanelli, Luca & Paruolo, Paolo, 2010. "Speed of adjustment in cointegrated systems," Journal of Econometrics, Elsevier, vol. 158(1), pages 130-141, September.
    7. Tanner, Glenn, 1997. "A note on economic news and intraday exchange rates," Journal of Banking & Finance, Elsevier, vol. 21(4), pages 573-585, April.
    8. Martin D. D. Evans & Richard K. Lyons, 2017. "Do Currency Markets Absorb News Quickly?," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 12, pages 477-505 World Scientific Publishing Co. Pte. Ltd..
    9. Martin D. D. Evans(Georgetown University and NBER) and Richard K. Lyons(U.C. Berkeley and NBER, Haas School of Business), 2005. "How is Macro News Transmitted to Exchange Rates? (December 2003)," Working Papers gueconwpa~05-05-05, Georgetown University, Department of Economics.
    10. Fratzscher, Marcel, 2009. "How successful is the G7 in managing exchange rates?," Journal of International Economics, Elsevier, pages 78-88.
    11. Chatrath, Arjun & Miao, Hong & Ramchander, Sanjay & Villupuram, Sriram, 2014. "Currency jumps, cojumps and the role of macro news," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 42-62.
    12. Puffer, Marlene K., 1995. "Measurement of the unexpected US trade deficit," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 247-273, April.
    13. Goldberg, Michael D., 1995. "Symmetry restrictions and the semblance of neutrality in exchange rate models," Journal of Macroeconomics, Elsevier, vol. 17(4), pages 579-599.
    14. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    15. repec:spo:wpecon:info:hdl:2441/10028 is not listed on IDEAS
    16. Christopher J. Neely & S. Rubun Dey, 2010. "A survey of announcement effects on foreign exchange returns," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 417-464.
    17. Fracasso, Andrea & Schiavo, Stefano, 2009. "Global imbalances, exchange rates adjustment and the crisis: Implications from network analysis," Journal of Policy Modeling, Elsevier, vol. 31(5), pages 601-619, September.

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