Louvre Agreement
The Louvre Agreement was signed on February 22, 1987 between the representatives of the G6 group ( France , Germany , Japan , USA , Great Britain and Canada ) in Paris . The aim of the agreement was to stabilize exchange rates within defined target zones in order to avoid speculative excesses and the associated global economic dangers. In particular, the devaluation of the US dollar against other currencies , which has been ongoing since 1985 as a result of the Plaza Agreement, should be stopped.
Goals and content
In the medium term, the agreement should reduce the twin deficit of the USA. The US reaffirmed its intention to reduce its budget deficit , while the other participants should work towards a balance of the trade deficit through fiscal measures (in particular raising the key interest rate and reducing protectionist trade restrictions) .
The exact target zones of the exchange rates were recorded in an additional protocol that was never published in order not to give investors the opportunity to speculate against these exchange rates. It is assumed that the targeted rate of the dollar should fluctuate by no more than 5% around 1.825 DM or 153.50 yen .
In the agreement, the participants undertook to hold meetings several times a year to discuss exchange rate developments and to coordinate their measures to influence it.
consequences
In the months after the signing, the dollar was initially able to stabilize. At the end of September 1987, however, short-term interest rates rose in Germany. Shortly afterwards, when the August trade data showed that the US trade deficit had narrowed only slightly, interest rates rose across all maturities in the US. Thereupon the then US Treasury Secretary James Baker expressed his displeasure with developments in Germany and urged the German government not to adhere to the provisions of the agreement. There were rumors in the media that the target zone for the US dollar would have to be lowered or that cooperation between the G7 countries would even break up. The international dispute increased the uncertainty in the currency markets, and the dollar valued on 16-17. October suddenly fell to 1.77 DM. On October 18, Baker finally announced in the New York Times that he would no longer support the falling dollar exchange rate. This monetary policy turbulence is seen as one of the reasons for the stock market crash on October 19, 1987, which went down in history as “ Black Monday ”.
Even the further appreciation of the yen, which made a decisive contribution to the emerging bubble economy in Japan, could not be stopped by the Louvre Agreement.
Web links
literature
- John Williamson: Estimating Equilibrium Exchange Rates . B&T, 1994, ISBN 0881320765 .
swell
- ↑ Krugman, Obstfeld, (2000), p. 591
- ^ Funabashi, Yoichi 1989: Managing the Dollar: From the Plaza to the Louvre . Institute for International Economics, Washington DC
- ↑ http://www.federalreserve.gov/monetarypolicy/files/FOMC19871103material.pdf