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The Case for a New Plaza Agreement

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  • 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.

Suggested Citation

  • William R. Cline, 2005. "The Case for a New Plaza Agreement," Policy Briefs PB05-04, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb05-04
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    Cited by:

    1. Schnabl, Gunther & Freitag, Stephan, 2009. "An asymmetry matrix in global current accounts," Working Papers 76, University of Leipzig, Faculty of Economics and Management Science.
    2. Rod Tyers & Ying Zhang, 2011. "Appreciating the Renminbi," The World Economy, Wiley Blackwell, vol. 34(2), pages 265-297, February.
    3. Rod Tyers & Ying Zhang, 2014. "Real exchange rate determination and the China puzzle," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 28(2), pages 1-32, November.
    4. YUAN, Chunming & CHEN, Ruo, 2015. "Policy transmissions, external imbalances, and their impacts: Cross-country evidence from BRICS," China Economic Review, Elsevier, vol. 33(C), pages 1-24.
    5. Eichengreen, Barry, 2006. "Global Imbalances and the Asian Economies: Implications for Regional Cooperation," Working Papers on Regional Economic Integration 4, Asian Development Bank.
    6. Chien-Chung Nieh & Hwey-Yun Yau, 2010. "The Impact of Renminbi Appreciation on Stock Prices in China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(1), pages 16-26, January.
    7. Kinkyo, Takuji, 2007. "Explaining Korea's Lower Investment Levels After the Crisis," World Development, Elsevier, vol. 35(7), pages 1120-1133, July.
    8. Chien-Chung Nieh & Hwey-Yun Yau, 2010. "The Impact of Renminbi Appreciation on Stock Prices in China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(1), pages 16-26, January.
    9. DANNE, Christian & SCHNABL, Gunther, 2008. "A role model for China? Exchange rate flexibility and monetary policy in Japan," China Economic Review, Elsevier, vol. 19(2), pages 183-196, June.
    10. Morris Goldstein & Nicholas Lardy, 2006. "China's Exchange Rate Policy Dilemma," American Economic Review, American Economic Association, vol. 96(2), pages 422-426, May.
    11. 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.

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