Plaza Accord

Definition

The Plaza Accord was a 1985 agreement among five major economies—the United States, Japan, West Germany, France, and the United Kingdom—to intervene in currency markets to depreciate the US dollar relative to the Japanese yen and German mark. This agreement aimed to correct trade imbalances and stabilize exchange rates, reflecting the interconnectedness of global economies and the influence of exchange rate regimes on international trade.

5 Must Know Facts For Your Next Test

1. The Plaza Accord was signed on September 22, 1985, as a response to growing concerns about the overvaluation of the US dollar.
2. The agreement led to significant interventions in currency markets, resulting in a substantial depreciation of the dollar against the yen and mark over the following years.
3. The Plaza Accord highlighted the role of cooperative international monetary policy as it involved direct coordination between central banks.
4. It served as a precedent for later agreements aimed at addressing currency imbalances and fostering international economic cooperation.
5. The effects of the Plaza Accord contributed to a global discussion on the need for effective mechanisms for managing exchange rate volatility.

Review Questions

• How did the Plaza Accord reflect the cooperative approach among major economies to manage currency values?
  • The Plaza Accord exemplified a collaborative effort among major economies to address concerns over currency valuation and trade imbalances. By agreeing to jointly intervene in currency markets, these nations demonstrated their recognition that unilateral actions could lead to further instability. The accord showcased how coordinated monetary policies could help stabilize exchange rates and promote fair trade practices across borders.
• Discuss the impacts of the Plaza Accord on global reserve currencies and how it influenced perceptions of the US dollar's role.
  • The Plaza Accord had significant implications for global reserve currencies as it aimed to reduce the dominance of the US dollar by facilitating its depreciation. This shift led to increased demand for alternative currencies like the yen and mark, affecting their roles as reserve currencies. As countries began to diversify their reserves away from solely relying on the dollar, it prompted discussions about currency stability and adjustments in reserve management strategies globally.
• Evaluate the long-term consequences of the Plaza Accord on international monetary policy coordination mechanisms.
  • The long-term consequences of the Plaza Accord on international monetary policy coordination were profound. It set a precedent for future agreements where countries recognized the importance of collaboration in addressing exchange rate issues. Subsequent accords built upon this framework, emphasizing the need for ongoing dialogue and cooperative measures among nations. The lessons learned from the Plaza Accord continue to shape how countries respond to currency crises and work together to ensure stability in global financial systems.

Related terms

Exchange Rate Intervention: Actions taken by a country's central bank to influence the value of its currency in relation to others through buying or selling currencies.

Bretton Woods System:

A monetary system established after World War II that created fixed exchange rates linked to the US dollar, which was convertible to gold.

Currency Depreciation: A decrease in the value of one currency relative to others, making exports cheaper and imports more expensive.