Working Paper: NBER ID: w2052
Authors: Martin Feldstein
Abstract: The September 1985 decision of the G-5 countries to pursue coordinated intervention has been widely credited with the subsequent sharp decline of the dollar relative to other major currencies, On the surface, the dollar's decline appears as evidence that coordinated intervention can be an effective instrument of economic policy, contrary to most of the previous economic analysis of this issue. The evidence in the present paper shows that such a conclusion is unwarranted. The dollar's decline in the nine months after the G-5 agreement was generally no faster than it had been since the beginning of its decline in the spring of 1985. The only indication of discontinuity in the overall behavior of the dollar was a drop of about 4 percent that occurred immediately after the G-5 meeting and that has largely persisted. Although this evidence cannot be taken as a conclusive indication that coordinated intervention had no effect on the dollar’s rate of decline, it does show the inappropriateness of interpreting the dollar's decline after September 1985 as evidence that coordinated intervention was effective. The special case of the Japanese yen is more ambiguous. Unlike all of the other G-5 currencies, the yen did appreciate more rapidly after the €5-5 meeting than it did before. But the Japanese government was also unique in making a major shift in monetary policy immediately after the G-5 meeting to strengthen the yen and the yen was also the major currency that could be expected to appreciate most as a result of the massive and unexpected decline of the price of oil in the first half of 1986.
Keywords: exchange rate; intervention; G5; dollar decline
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Coordinated intervention by the G5 countries (F53) | Rate of decline of the dollar (F31) |
| Dollar's decline after the G5 meeting (F31) | Rate of decline of the dollar (F31) |
| G5 meeting (F53) | Dollar's value (F31) |
| G5 meeting (F53) | Average rate of decline of the dollar (F31) |
| G5 meeting (F53) | Trade-weighted value of the dollar (F31) |
| Simultaneous shift in Japanese monetary policy (E49) | Appreciation of the Japanese yen (F31) |