Address by Michel Camdessus
IMF News, October 23, 1995
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Bibliographic details
- Published: October 23, 1995
Context and purpose
- Speaker: Managing Director of the International Monetary Fund, Michel Camdessus.
- Occasion: Given at the Japan Center for International Finance (JCIF), Tokyo, October 23, 1995.
- Focus: Stability of foreign exchange rates and the international monetary system; assessment of the Plaza Agreement a decade on; implications for G-7 policy coordination and the role of the IMF.
Plaza Agreement: achievements and enabling conditions
- Key achievements attributed to the Plaza Agreement:
- Helped convince the market that exchange rates—and in particular, the value of the U.S. dollar—were not consistent with economic fundamentals and that the G-5, and particularly the U.S., were determined to correct this misalignment.
- Contributed to an orderly adjustment of exchange rates—the much hoped for "soft landing" of the dollar.
- Conditions that made the Plaza Agreement possible:
- A clearly identifiable threat: by late 1984 and early 1985, the value of the dollar was "obviously unsustainable" with substantial risk of a disorderly correction.
- Widening external imbalances: U.S. deficit and Japanese and German surpluses; mounting protectionist sentiment in the United States; inflationary pressures elsewhere.
- Recognition of economic interdependence among the G-5, producing willingness to account for other countries' circumstances in domestic policy formulation.
- Broad consensus on the role of exchange market intervention, including endorsement of the Jurgensen Report conclusion that "under appropriate circumstances, market intervention was a useful instrument of exchange rate policy."
- A sense of common purpose and responsibility among the Five.
Subsequent G-7 coordination episodes and lessons
- Continued G-5/G-7 solidarity through:
- Tokyo Summit, May 1986: use of objective indicators to assess economic performance.
- Louvre, February 1987: agreement that exchange rates were broadly in line with fundamentals and attempt to stabilize currencies within "reference ranges."
- Noted shortcomings:
- Insufficient emphasis on macroeconomic discipline to underpin exchange rate stability objectives.
- Illustrative episode: April 1990
- Japanese stock prices plummeted and yen declined after the bursting of Japan's "asset-price bubble."
- G-7 statements in Paris and Washington helped halt the yen's decline and launch a substantial recovery in the yen's value.
Erosion of G-7 coordination: identified causes
- Reorientation to domestic priorities:
- U.S.: recovery from the 1989-91 recession.
- Japan: management of its financial crisis.
- Germany: unification.
- Result: G-7 members increasingly "looked inward," reducing scope for cooperation.
- Globalization and scale of financial markets:
- Increased size and agility of international financial markets made coordinated intervention more difficult and contributed to skepticism about monetary authorities' ability to influence exchange rates.
- Central bank survey preliminary results suggest that over the last three years, average daily turnover may have increased by as much as 50 percent to well over $1 trillion.3
- EMS crises of 1992 and 1993:
- Events: the pound and the lira left the ERM, the Spanish peseta was devalued, and ERM exchange rate bands were widened considerably.
- Effect: illustrated danger of overreliance on exchange rate schemes without sufficient economic policy fundamentals; led markets to conclude intervention had limited power—spillover effect on G-7 coordination.
1995 developments and renewed coordination
- A major misalignment in 1995: an overvalued yen clearly identifiable and in common interest of G-7 countries to correct.
- Supporting developments cited:
- June data suggesting resumption of U.S. growth after a sluggish second quarter.
- Evidence that pace of recovery in Germany had slowed during first half of the year.
- Moves by Japanese authorities to ease short-term interest rates and liberalize rules for holding foreign currency assets.
- Progress in U.S.-Japan trade negotiations.
- Prospects for further fiscal consolidation in the U.S.
- Result: coordinated intervention by major central banks surprised the market and reinforced the dollar's modest recovery.
Key statistics and historical figures preserved
- Market turnover: "over the last three years, average daily turnover may have increased by as much as 50 percent to well over $1 trillion."3
- Global financial expansion examples (as cited from Alan Greenspan):
- World trade in nominal dollars increased by about 125 percent between 1983 and 1993.
- Stock of cross-border assets held by banks grew by 250 percent over the same period.
- Annual issuance of international securities increased by 300 percent between 1984 and 1994.
- References and dates cited in the address:
- Jurgensen Report: March 1983 (Report of the Working Group on Exchange Market Intervention).
- Versailles Summit: June 4-6, 1982.
- Financial Times citation: September 20, 1995, p. 1.
Policy recommendations and prescriptions
- Reassert G-7 international leadership:
- Move beyond modest policy cooperation toward the more rigorous requirements of policy coordination.
- Recognize the "different world" of greater trade and capital flows where exchange rate misalignments have a more profound effect on domestic growth and prosperity.
- Build on the August 1995 achievement:
- Acknowledge that when the market drove the yen to about ¥80 to the dollar it was "beyond all reasonable relationship to economic fundamentals."
- Assessment of current misalignments (1995): "the U.S. dollar continues to look a little weak against the deutsche mark and closely linked European currencies, as well as against the Japanese yen."
- Suggested aim: induce some further correction of the dollar against the DM and the yen, or at least resist a significant depreciation of the dollar from present levels.
- For credibility, secure the fundamental conditions for a stronger dollar and more realistically valued yen over the medium and longer term:
- United States and several other countries: accelerate fiscal consolidation.
- Japan: continue to open up the economy; boldly reduce the still very high current account surplus through an increase in support for ODA and reform programs in developing countries; strengthen the financial sector and support domestic economic recovery.
- Other countries: accelerate structural reform, especially in labor markets.
- All countries: aim toward a greater degree of domestic price stability.
- Continue signaling exchange rate views to the market and, if needed and in appropriate circumstances, back them up with coordinated intervention.
- Strengthen relations between the G-7 and other major players:
- Recognize that the number of countries with potentially global impact has increased; relations between the G-7 and other major players need to be strengthened.
- Expand and better use IMF machinery:
- The IMF's attributes: virtually universal membership of 180 countries, mandate "to promote exchange stability," and unique staff expertise.
- Suggestions for IMF use:
- Draw more heavily upon the Fund's analysis of exchange rates and macroeconomic policies.
- Use the Fund's technical resources and improved data/timeliness to enhance its "early warning system."
- Utilize the Interim Committee as a global forum for regular, frequent, frank, and timely discussions on macroeconomic policy and exchange rate matters.
Concluding stance
- Caution against premature return to Louvre "reference ranges" but encouragement to pursue achievable objectives:
- "I do not believe that the time is ripe for a leap beyond the 'reference ranges' embodied in the Louvre Accord..."
- Nonetheless, "Enhanced international monetary coordination and exchange rate stability are, in my view, two such objectives—and ones that the IMF stands ready to assist the G-7 and other countries in achieving."
Address by Michel Camdessus, Managing Director of the International Monetary Fund, Japan Center for International Finance (JCIF), Tokyo, October 23, 1995.