G7-April-2008-Meeting and Plaza-Accord

French Finance Minister Christine Lagard has compared the recent FSFreport released by the G7 Finance Ministers last week to the Plaza Accord (as quoted by Christopher Swann in an article at Bloomington):

The April 11 statement was “not very different” from the importance of the 1985 Plaza Accord.

The Plaza Accord reached by the G7 in 1985 refers to a joint intervention in the Currency Markets against the stark appreciation of the US-Dollar in the 1980s. If the comparison is right, then Finance Ministers and Central Bank Governors have agreed to intervene into the currency markets to stabilize the value of the dollar.

Log nominal value of US dollar against other major currencies. NBER defined recession dates shaded gray. Source: Federal Reserve Board via FRED II via Econonbrowser.

Menzie Chinn at Econbrowser discusses the article and is skeptic about the capability of G7 finance ministers to intervene in foreign exchange markets:

  • Policymakers, especially finance ministers, have limited means to affect exchange rates directly. […]
  • The evidence that sterilized intervention works is actually more mixed than is commonly allowed. […]
  • When effects of intervention have been identified, they typically (although not always) seem to be of a short term nature. […]

Prof. Chinn goes on to quote from Owen Humpage’s “Government Intervention in the Foreign Exchange Market” (2003):

Sterilized intervention affords monetary policy makers a means of occasionally pushing an exchange rate in a desired direction. The alternative level then serves as a new starting point for a random walk process compatible with existing fundamentals.

Prof. Chinn then argues that while monetary policy makers cannot change the underlying market fundamentals, their signal to intervene in currency markets can be credible if also the fiscal policies are adjusted.

He predicts that the exchange rate intervention is not immiment, but will occur sooner or later:

If the Fed perceives that the dollar has dropped far enough to keep the U.S. economy out of a deep recession, and the ECB perceives the euro has risen enough to adversely impact euro area economic activity at a time of a pronounced slowdown (see here), then “the stars will be aligned” for a change in the path of (monetary) fundamentals, and hence the value of the dollar.

It is strange that both the Bloomington article and the Econbrowser-blog-post focus so much on exchange rates because Christine Lagard does make some interesting comments in the interview given to Bloomberg Television.

She points out to a special calendar: a 100-day-action-plan (with one of the instruments being a call for disclosure of the losses by banks) and a 300-day-action plan. The measures suggested in the FSF-Report are however not as clearly structured in a 100- and 300-days-action-plan.

Interestingly as well, she sees the changes of International Accounting Standards to be the most crucial one:

Bloomington: Is there a specific change, a specific part of that plan that will make the most immediate difference?

Lagarde: I think the demand that we are putting on the International Accounting Supervisory Board [probably the IASB] is going to be the most critical one. Because what we are saying is actually that the accounting principles that apply at the moment – the marked-to-market is fine, we are not questioning that at all – but we’re simply saying that in the absence of market [liquidity] then clearly additional tools need to be used, indices and various other mechanisms that we want the IASB to actually recommend. And that is important because it will help banks in particular, financial institutions in general, to actually to put a value on something which could not be valued so far.

To make another prediction: the micro-economic changes agreed upon by the G7 Finance Ministers will have a much bigger impact on this crisis as the exchange interventions that the interested public mind seems to crave for.

15. April 2008 by kasi
Categories: Discussions | Tags: , , , , , , , , , | 1 comment

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