John Taylor “celebrates” 30 years of the Plaza Accord

John Taylor:

That the dollar depreciated across the board—as much against the mark as against the yen—suggests that it was part of a general reversal of the dollar appreciation experienced during 1981-1985 due to the monetary policy strategy the Fed had put in place.  As Alan Greenspan put it in an FOMC meeting in 2000, “There is no evidence, nor does anyone here [in the FOMC] believe that there is any evidence to confirm that sterilized intervention does anything.”

The dates of the Plaza and the Louvre meetings are marked in the chart. Observe how the move toward an excessively restrictive policy starts at the time of the Plaza meeting. Indeed, as chart shows, the Bank of Japan increased its policy rate by a large amount immediately following the Plaza meeting, which was in the opposite direction to what macroeconomic fundamentals of inflation and output were indicating. Then, after a year and a half, starting around the time of the Louvre Accord, Japanese monetary policy swung sharply in the other direction—toward excessive expansion.  The chart is remarkably clear about this move. The policy interest rate swung from being up to 2¼ percentage points too high between the Plaza and the Louvre Accord to being up to 3½ percentage points too low during the period of time from the Louvre Accord to1990.

The highlighted sections denote “rubbish”. The dollar never appreciated relative to the yen in the years before the Plaza. It did so against the German DM. So you cannot say “it was part of a general reversal of the dollar appreciation experienced during 1981-1985…”

And God forbid what would have happened to the Japanese economy if between 1987 and 1990 the BoJ had followed the “Taylor-rule”! As we now know, that was the time that Japanese NGDP flattened out and Japanese real growth all but disappeared!


The fact is that Japan could never let the yen depreciate relative to the dollar. It could and should appreciate! The initial rise in the BoJ´s call rate was to make sure that happened.

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