> Doug, it sounds like you take a kind of Marxian line on exchange
>rates -- that policy is mostly futile, that rates are determined by
>fundamentals.
I find Anwar Shaikh's analysis of long-term exchange rates pretty compelling: they're determined by relative productivity differences. That is, the decline of the dollar vs. the mark and yen into the early 1980s was driven by faster productivity growth in Japan and Germany than the U.S. Oscillations around that fundamental trend can be significant, though, and are driven mainly by international capital flows. Those flows drove the dollar way beyond what relative productivity differences would warrant, which is why I said the US$ was ready to decline by 1985.
I wouldn't argue that policy is futile, though. Raising interest rates, or keeping them high, can boost the value of a currency for quite some time. Well-timed interventions can change market psychology, too.
> But a lot of policymakers seem to think their actions have a
>big effect on exchange-rate outcomes. One of Gowan's sources for the
>anti-Mitterand dollar policy is a book published by the Instiute for
>International Economics called "Dollar Politics" which is pretty insiderish
>and which seems to take it for granted that policymakers can use exchange
>rates as an instrument of diplomacy. (Not that insiders necessarily know
>what's going on better than us outsiders do.)
If there's anything beyond Volcker's anal-retentive monetary policy of the early 1980s and the Reagan administration's stated preferences to this high-dollar strategy, I'd like to hear about it.
> If the Plaza agreement was only a psychological catalyst for a shift
>in currency values that was in line with the fundamentals, as you say, why
>was it attempted? Were the G7 finance ministers misinformed about how
>exchange rates are determined? (Again, not that that would be impossible.)
I think they believe that FX rates are determined mainly by monetary and fiscal policies, and don't take the Shaikh line on relative productivity. But the time-horizons of most policymakers are much shorter than Marxian political economists.
> I agree that Reagan's America was a better place to invest than
>socialist France. But don't you think that if the German Bundesbank had
>decided to ignore the high dollar and reflate with France, investors would
>have been less able to act on their preference for Reagan's America? And
>then Reagan would not have won the "policy battles on a world scale" quite
>as much as he ended up doing?
Up to a point, but even Buba couldn't resist a capital outflow for too long.
> And finally, how did the Plaza agreement work? Was it an agreement
>on currency interventions or interest rates or what?
Good question. There was substantial intervention, and the U.S. lowered interest rates and made the first of many resolutions to reduce its budget deficit. But beyond that, I don't really know.
Doug