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POLI 243 Lecture 19 Notes
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POLI 243 Lecture 19 Notes: Japan & Intl Monetary Cooperation
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Lecture 19 - March 27th, 2019Japan and International Monetary Cooperation
The Plaza and Louvre Accords
What did Japan do with their monetary policy in the 1980s? Japan agrees to increase the value of
their currency in two agreements with the United States and others (Plaza and Louvre accords).
These accords signify a break in Japanese practices, as they: 1. Increase the value of the yen, and
2. Agree to a domestic stimulus package. Prior to the accords, the Japanese had not agreed to a
domestic stimulus package, let alone in international negotiations.
, Conflict between the U.S. and Japan
What was the setting? What were the problems with monetary relations in the 1980s? Where
does the conflict between the United States and Japan emerge from?
Historically the yen had been undervalued
- Recall: Bretton Woods. During WWII, the U.S. held a conference regarding post-war
monetary arrangements.
- U.S. gets their version approved, is applied in the 1950s
- Members of the IMF would have fixed exchange rates; they agreed to hold their
currencies at a steady value against each other.
- This proved problematic (Mundell-Fleming framework captures why)
- In the context of the late 1940s/50s, when states are implementing the Bretton Woods
rules, they are also trying to economically recover from WWII and deal with the start of
the Cold War.
- US is dealing with West Germany, Japan, France, and Britain
- The U.S. encourages these countries to undervalue their currencies versus the dollar.
- Historically the Japanese yen had been undervalued, and West Germany’s currency was
also undervalued at the time ← needed help
- In the 1960s, West Germany and Japan both did very well economically; this economic
recovery was driven by their ability to export goods as a result of their beneficial
monetary policies with the U.S. and access to the American market
Bretton Woods regime collapses in early 1970s
- Mundell and Fleming notinced tensions emerging between the different aspects of the
Bretton Woods rules in the 1960s:
- 1. Fixed exchange rate: if the price of currencies started to move in one direction or
another, countries’ governments would intervened on the exchange markets to push the
price back to the promised ratio.
- 2. Domestic monetary policy autonomy - Countries wanted to used Keynesian policy to
manage their economies: this meant adjusting interest rates up or down domestically,
changing the domestic price of their currency while keeping the market price on the
foreign exchange markets stable.
- This is the tension that emerges when you start to remove capital controls.
- Most of these countries had capital controls in place in the late 40s/50s to help their
economies recover from the war.
- Mundell and Fleming recognized the repercussions of capital controls being removed.
- Changing the domestic price of a currency (using domestic interest rates) while trying to
keep the exchange rate stable in relation to the U.S. dollar is not going to work well.
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