Why Was the Plaza Accord Unique?
Papell, David H.
This chapter explores what made the Plaza such a unique combination of strong cooperation and effective intervention relative to the rest of the post-Bretton Woods period. We demonstrate that in the first quarter of 1985 the US dollar was more overvalued in real terms, relative to exchange rates implied by real interest differentials, for all G-7 economies except Canada, than at any other time between 1973 and 2005. Further, we use Taylor rules to create a benchmark for consistency of intervention with monetary policy. We show that foreign exchange intervention in 1985 was consistent with the direction of monetary policy prescribed by the deviation of policy rates from the implied Taylor rule rates for the U.S., but only weakly so for Germany and Japan. This reinforces the view that the impact of the Plaza on exchange rates derived primarily from the major policy shift in the U.S.