A Detailed Guide To Understanding A Mar-a-Lago Accord
- Stephen H Akin
- 3 days ago
- 20 min read
The Mar-a-Lago Accord is a proposed economic and trade initiative associated with the second term of the Donald Trump administration. Named after Trump’s Mar-a-Lago estate in Florida.
What Is the Mar-a-Lago Accord
The Mar-a-Lago Accord is a proposed economic and trade initiative associated with the second term of the Donald Trump administration. Named after Trump’s Mar-a-Lago estate in Florida, the Accord is designed as a blueprint for restructuring global trade and monetary relations, with the central goal of devaluing the U.S. dollar while preserving its status as the world’s primary reserve currency. The plan aims to reduce the U.S. trade deficit, restore domestic manufacturing, and realign international economic relationships by using a mix of tariffs, currency and capital measures, and trade agreements linked to national security.
Historical Inspiration and Key Proposals
The Mar-a-Lago Accord draws inspiration from the 1985 Plaza Accord, in which the U.S. and several major economies coordinated to weaken the dollar and address trade imbalances.However, the Mar-a-Lago Accord differs in its approach and context:
It proposes multilateral or unilateral actions to make the dollar less attractive as a reserve currency, including pressuring other countries to appreciate their currencies relative to the dollar.
The plan envisions using tariffs and the threat of restricted access to U.S. markets or security guarantees as leverage to secure foreign cooperation.
There are discussions of converting foreign holdings of U.S. Treasuries into ultra-long-term (100-year) bonds, and even proposals for a U.S. sovereign wealth fund financed by revaluing gold reserves.
Strategic Goals
The Accord’s main objectives are:
Lowering the value of the U.S. dollar to boost American manufacturing and exports.
Reducing the U.S. trade and current account deficits.
Maintaining the dollar’s dominance in global finance, despite efforts to weaken it.
Criticisms and Challenges
Economists and foreign officials have raised significant concerns about the feasibility and risks of the Mar-a-Lago Accord:
The global context is very different from 1985: China is now a dominant trade power, and many central banks no longer intervene in currency markets as they once did.
The plan could destabilize global trade, strain alliances, and potentially backfire on the U.S. economy by undermining trust in U.S. financial assets.
Critics argue that the underlying causes of U.S. trade deficits—such as low private savings and high government borrowing—would remain unaddressed.
The Trump administration’s confrontational diplomatic style has made it more difficult to build the trust and cooperation needed for a coordinated international monetary realignment.
Current Status
As of early 2025, the Mar-a-Lago Accord remains a proposal and has not been implemented. Negotiations are at an early stage, and many details are confidential due to the sensitivity of international talks. The initiative is closely associated with Stephen Miran, chair of the Council of Economic Advisers, and Scott Bessent, Secretary of the Treasury.
CEA Chairman Steve Miran, Hudson Institute Remarks:
Today I’d like to discuss the United States’ provision of what economists call “global public goods,” for the entire world. First, the United States provides a security umbrella which has created the greatest era of peace mankind has ever known. Second, the U.S. provides the dollar and Treasury securities, reserve assets which make possible the global trading and financial system which has supported the greatest era of prosperity mankind has ever known.
Both of these are costly to us to provide.
On the defense side, our men and women in uniform take heroic risks to make our nation and the world safer, preserving our liberties generation after generation. And we tax hardworking Americans mightily to finance global security. On the financial side, the reserve function of the dollar has caused persistent currency distortions and contributed, along with other countries’ unfair barriers to trade, to unsustainable trade deficits. These trade deficits have decimated our manufacturing sector and many working-class families and their communities, to facilitate non-Americans trading with each other.
Let me clarify that by “reserve currency,” I mean all the international functions of the dollar—private savings and trade included. I’ve often used the example that when private agents in two separate foreign countries trade with each other, it’s typically denominated in dollars because of America’s status as the reserve provider. That trade entails savings housed in dollar securities, often Treasurys. As a result of all this, Americans have been paying for peace and prosperity not just for themselves, but for non-Americans too.
President Trump has made it clear that he will no longer stand for other nations free-riding on our blood, sweat, and tears, whether in national security or trade. The Trump Administration has already, in its first hundred days, moved forcefully to reorient our defense and trading relationships to place Americans on fairer ground. The President has promised to rebuild our broken industrial base and pursue trade terms that put American workers and businesses first.
I’m an economist and not a military strategist, so I’ll dwell more on trade than on defense, but the two are deeply connected. To see how it works, imagine two foreign nations, say China and Brazil, trading with each other. Neither country has a currency that is trusted, liquid, and convertible, which makes trading with each other challenging.
However, because they can transact in U.S. dollars backed by U.S. Treasuries, they are able to trade freely with each other and prosper. Such trade can only occur because of U.S. military might ensuring our financial stability and the credibility of our borrowing. Our military and financial dominance cannot be taken for granted; and the Trump Administration is determined to preserve them.
But our financial dominance comes at a cost. While it is true that demand for dollars has kept our borrowing rates low, it has also kept currency markets distorted. This process has placed undue burdens on our firms and workers, making their products and labor uncompetitive on the global stage, and forcing a decline of our manufacturing workforce by over a third since its peak1 and a reduction in our share of world manufacturing production of 40%.
We need to be able to make things in this country, as we saw during Covid, when many of our supply chains could not survive without being reliant on our biggest adversary, China. We clearly should not rely on our biggest adversary for equipment essential to keeping our population safe and secure. Nor should our biggest adversary be allowed to benefit so much from an international security and financial architecture we finance.
There are other unfortunate side effects of providing reserve assets. Others may buy our assets to manipulate their own currency to keep their exports cheap. In doing so, they end up pumping so much money into the U.S. economy that it fuels economic vulnerabilities and crises. For example, in the years running up to the 2008 crash, China along with many foreign financial institutions, increased their holdings of U.S. mortgage debt, which helped fuel the housing bubble, forcing hundreds of billions of dollars of credit into the housing sector without regard as to whether the investments made sense. China played a meaningful role creating the Global Financial Crisis. It took almost a decade to recover, until President Trump got us back on track in his first term.
In my view, to continue providing these twin global public goods, there needs to be improved burden-sharing at the global level. If other nations want to benefit from the U.S. geopolitical and financial umbrella, then they need to pull their weight, and pay their fair share. The costs cannot be solely borne by everyday Americans who have already given so much.
The best outcome is one in which America continues to create global peace and prosperity and remain the reserve provider, and other countries not only participate in reaping the benefits, but they also participate in bearing the costs. By improving burden sharing, we can enhance resilience, and preserve the global security and trading systems for many decades into the future.
Moreover, it is critical not just for fairness, but for capacity. We are under siege by hostile adversaries trying to erode our manufacturing and defense industrial base and disrupt our financial system; we will be able to provide neither defense nor reserve assets if our manufacturing capacity is hollowed out. The President has been clear that the United States is committed to remaining the reserve provider, but that the system must be made fairer. We need to rebuild our industries to project the strength needed to protect reserve status, and we need to be able to pay our bills to do so.
What forms can that burden sharing take? There are many options, here are a few ideas:
First, other countries can accept tariffs on their exports to the United States without retaliation, providing revenue to the U.S. Treasury to finance public goods provision. Critically, retaliation will exacerbate rather than improve the distribution of burdens and make it even more difficult for us to finance global public goods.
Second, they can stop unfair and harmful trading practices by opening their markets and buying more from America;
Third, they can boost defense spending and procurement from the U.S., buying more U.S.-made goods, and taking strain off our servicemembers and creating jobs here;
Fourth, they can invest in and install factories in America. They won’t face tariffs if they make their stuff in this country;
Fifth, they could simply write checks to Treasury that help us finance global public goods.
Tariffs deserve some extra attention. Most economists and some investors dismiss tariffs as counterproductive at best and devastatingly harmful at worst. They’re wrong.
One reason the economic consensus on tariffs is so wrong is because nearly all of the models that economists use to study international trade assume either no trade deficits at all, or assume that deficits are short-lived and quickly self-correct through currency adjustments. According to standard models, trade deficits will cause the dollar to weaken, which reduces imports and boosts exports, eventually wiping out the trade deficit. If that happens, tariffs may be unnecessary, because trade will balance itself over time and, in this view, intervening with tariffs can only make things worse.
However, that view is at odds with reality. The United States has run current account deficits now for five decades, and these have widened precipitously in recent years, going from about 2% of GDP in the first Trump Administration to a high of nearly 4% of GDP in the Biden Administration. And this has happened all while the dollar has appreciated, not depreciated!
The long run is here, and the models are wrong. One reason is that they fail to account for the U.S. provision of the global reserve currency. Reserve status matters and, because demand for the dollar has been insatiable, it has been too strong for international flows to balance, even over five decades.
More recent economic analyses allow for the possibility of persistent trade deficits that resist automatically rebalancing, which is more in line with reality in the U.S. They show that by imposing tariffs against exporting countries, the U.S. can improve economic outcomes, raise revenues, and impose huge losses for the tariffed nation, even with full retaliation.
In this sense, analysis of what economists call the “incidence” of tariffs indicates that a large share and burden of the tariffs are “paid for” by the country on which we’re applying the tariffs. Countries that run large trade surpluses are pretty inflexible—they can’t find other sources of demand to substitute for America’s. Instead, they have no choice but to export, and America is the largest consumer market in the world. By contrast, America has plenty of substitution options: we can make stuff at home, or we can buy from countries that treat us fairly instead of from countries that take advantage of us. This difference in leverage means that other countries end up bearing the cost of tariffs.
In 2018-2019, China bore the cost of President Trump’s historic tariffs through a weaker currency, meaning their citizens became poorer, with less purchasing power on the global stage. The tariff revenue, paid for by China, was used to finance President Trump’s tax cuts for American workers and firms. This time around, tariffs will help pay for both tax cuts and deficit reduction.
Lower taxes on Americans, financed in part by revenue provided from foreigners, will create economic growth, dynamism, and opportunity the likes of which our country has never seen, ushering in President Trump’s new Golden Age. Deficit reduction will help lower Treasury rates, and with them mortgage rates and consumer credit card rates, stimulating an economic boom.
It is important to note here that tariffs are not levied simply to collect revenues. For example, the President’s reciprocal tariffs are designed to address tariff and non-tariff barriers and other forms of cheating like currency manipulation, dumping, and subsidies to gain unfair advantage. Revenue is a nice side effect, and if it is used in part for lowering taxes, it can help turbo-charge competitiveness improvements that boost U.S. exports.
Burden sharing can allow the United States to continue leading the free world for many decades. It’s a must not only for fairness, but for feasibility. If we don’t rebuild our manufacturing sector, we will be strained in providing the security we need for our safety and to underpin our financial markets. The world can still have the American defense umbrella and trading system, but it’s got to start paying its fair share for them. Thank you, and I am happy to take some questions.
Comparison: Mar-a-Lago Accord vs. 1985 Plaza Accord
Feature | Plaza Accord (1985) | Mar-a-Lago Accord (Proposed, 2025) |
Participants | G5: US, Japan, West Germany, France, UK | Unclear; would need to include China and other major trade partners |
Objective | Coordinated devaluation of the US dollar to address trade imbalances | Strategic devaluation of the US dollar to reduce US trade deficit |
Mechanism | Multilateral currency market interventions, fiscal adjustments | Mix of tariffs, unilateral/multilateral pressure, possible bond restructuring |
Context | US dollar seen as overvalued; global financial system more complex, less consensus among major economies | |
Outcome | Dollar depreciated ~40% vs. major currencies; short-term trade balance improvement | Not implemented; feasibility questioned due to lack of global coordination and changed economic landscape |
Key Differences | Central banks intervened directly in FX markets; US allies were primary partners | Central banks less likely to intervene; China is now a dominant player and less likely to cooperate |
Criticisms | Only short-term success; did not address underlying US savings/investment imbalance | Unlikely to succeed due to lack of international buy-in and changed global dynamics; risk of instability |
A User’s Guide to Restructuring the Global Trading System
Council of Economic Advisers Stephen Ira Miran
Nearly one-fifth of the EURO ZONE Bank funding needs are denominated in U.S. dollars, with the lenders borrowing in markets for short-term funding that can shut down abruptly in times of financial stress.
Treasury Secretary Scott Bessent "Deep Dive" with Fox News and Bloomberg TV Interviews: "Laffer Curve for Tariffs"
He also said he expects the US budget deficit "to be something with a 3% in front of it by 2028" with revenue from tariffs to be used to solve the deficit.
Bessent said he is not worried about bond market moves which he stressed was happening globally.
There was much more in the two interviews; here is a summary of the main topics covered:
Substantial revenue now coming in thanks to tariffs.
Very optimistic on outlook for deficit.
Over the next couple weeks we're going to have several large deals announced.
Says EU has a collective action problem.
Expect they will be negotiating with China in person again.
Very optimistic Germany can help push the EU forward.
May see a US-Germany reset under Chancellor Merz.
Wrong to think bonds are moving on US Congress action
As US growth accelerates not worried about debt dynamics.
Not particularly worried about markets are thinking.
Wouldn't necessarily categorize it as weak Dollar.
Other countries' currencies rising, not Dollar falling.
There is a lot of resistance to government spending cuts.
Deregulation is to kick in for growth in Q3-Q4, 2026.
Want to make the US the most attractive for capital.
Very close to moving the SLR and could see SLR move over the summer.
A shift in SLR could have an impact on Treasury yields.
When trade deals are sorted, can focus on the privatization of Fannie Mae and Freddie Mac.
G7 was very concerned about imbalances around China.
Treasury Secretary Scott Bessent Remarks before the Institute of International Finance
Introduction
Thank you for that kind introduction. It’s an honor to be here.
In the final months of World War II, Western leaders convened the greatest economic minds of their generation. Their task? To build a new financial system.
At a quiet resort high up in the mountains of New Hampshire, they laid the foundation for Pax Americana.
The architects of Bretton Woods recognized that a global economy required global coordination. To encourage that coordination, they created the IMF and the World Bank.
These twin institutions were born after a period of intense geopolitical and economic volatility. The purpose of the IMF and the World Bank was to better align national interests with international order, thereby bringing stability to an unstable world.
In short, their purpose was to restore and preserve balance.
This remains the purpose of the Bretton Woods institutions. Yet everywhere we look across the international economic system today, we see imbalance.
The good news: it doesn’t have to be this way. My goal this morning is to outline a blueprint to restore equilibrium to the global financial system and the institutions designed to uphold it.
I have spent the bulk of my career from the outside looking in on financial policy circles. Now I am on the inside looking out. And I am eager to work with each of you to restore order to the international system. To achieve this, however, we must first reconnect the IMF and World Bank with their founding missions.
The IMF and World Bank have enduring value. But mission creep has knocked these institutions off course. We must enact key reforms to ensure the Bretton Woods institutions are serving their stakeholders—not the other way around.
Bringing balance back to global finance will require clear-eyed leadership from the IMF and World Bank. This morning, I will explain how they can provide that leadership to build safer, stronger, and more prosperous economies all around the world. I wish to invite my international counterparts to join us in working toward these goals.
On this point, I wish to be clear: America First does not mean America alone. To the contrary, it is a call for deeper collaboration and mutual respect among trade partners.
Far from stepping back, America First seeks to expand U.S. leadership in international institutions like the IMF and World Bank. By embracing a stronger leadership role, America First seeks to restore fairness to the international economic system.
The Louve Accord
The Louvre Accord (formally, the Statement of the G6 Finance Ministers and Central Bank Governors) was an agreement, signed on February 22, 1987, in Paris, that aimed to stabilize international currency markets and halt the continued decline of the US dollar after 1985 following the Plaza Accord. It was considered, from a relational international contract viewpoint, as a rational compromise solution between two ideal-type extremes of international monetary regimes: the perfectly flexible and the perfectly fixed exchange rates.
The agreement was signed by Canada, France, West Germany, Japan, the United Kingdom, and the United States. The Italian government was invited to sign the agreement but declined.
Background
A precursor to the Louvre Accord was the Plaza Accord, which was agreed upon during the G7 Minister of Finance meeting held in New York in 1985 and aimed to depreciate the US dollar relative to the Japanese yen and German Deutsche Mark. The United States had a trade deficit while Japan and a few European countries were experiencing a trade surplus along with negative GDP growth. The then U.S. Treasury Secretary James Baker attempted to address the imbalance by encouraging its trade partners to stimulate their economies so they can purchase more from it.He maintained that if these partners did not grow, he would allow the dollar's continued depreciation.
After the Plaza Accord, the dollar depreciated, reaching an exchange rate of ¥150 per US$1 in 1987. By this time, the nominal dollar exchange rate against other currencies had fallen more than 25%.The ministers of the G7 nations gathered at the French finance ministry, then located inside the Louvre Palace in Paris, to minimize this decline and stabilize it around the prevailing levels. The Louvre Accord may have helped prevent a recession because it stopped the US dollar from decreasing further in relation to other currencies.
Provisions
France agreed to reduce its budget deficits by 1% of GDP and cut taxes by the same amount for corporations and individuals. Japan would reduce its trade surplus and cut interest rates. The United Kingdom would reduce public expenditures and reduce taxes. Germany, the real object of this agreement because of its leading economic position in Europe, would reduce public spending, cut taxes for individuals and corporations, and keep interest rates low. The United States would reduce its fiscal 1988 deficit to 2.3% of GDP from an estimated 3.9% in 1987, reduce government spending by 1% in 1988 and keep interest rates low.
Impact
The US dollar continued to weaken in 1987 against the Deutsche Mark and other major currencies, reaching a low of 1.57 marks per dollar and 121 yen per dollar in early 1988. The dollar then strengthened over the next 18 months, reaching over 2.04 marks per dollar and 160 yen per dollar, in tandem with the Federal Reserve raising interest rates aggressively, from 6.50% to 9.75%.
Plaza Accord
Plaza Accord: Overview
The Plaza Accord was a landmark agreement signed on September 22, 1985, at the Plaza Hotel in New York City by the finance ministers and central bank governors of the G-5 nations: the United States, Japan, West Germany, France, and the United Kingdom.
Purpose and Context
The main goal was to address the sharp appreciation of the U.S. dollar, which had risen by nearly 45% against other major currencies in the first half of the 1980s.
This strong dollar made U.S. exports expensive and imports cheap, contributing to a record U.S. trade deficit and mounting protectionist pressures in Congress.
The agreement aimed to coordinate policies to depreciate the dollar relative to the Japanese yen and the German Deutschmark, thereby improving U.S. competitiveness and correcting global trade imbalances.
Key Provisions
The G-5 countries agreed to intervene jointly in currency markets to bring down the value of the dollar.
The U.S. pledged to reduce its federal deficit, while Japan and Germany agreed to stimulate domestic demand through policy measures like tax cuts.
Outcomes and Impact
The dollar depreciated by about 25–40% over the next two years, while the yen and Deutschmark appreciated significantly.
The U.S. trade deficit with Germany improved, but the deficit with Japan persisted.
The Plaza Accord is widely regarded as a uniquely successful example of international currency policy coordination.
However, it also had unintended consequences: the rapid appreciation of the yen contributed to asset bubbles in Japan, followed by the "Lost Decade" of stagnation and deflation in the 1990s.
Legacy
The Plaza Accord marked a high point in international economic cooperation, inspiring further efforts such as the Louvre Accord in 1987, which aimed to stabilize exchange rates after the dollar’s sharp decline.
It remains a key reference point in discussions of global economic policy coordination and the management of currency imbalances.
The Plaza Accord as Blueprint
A look at the trade conflict unleashed by U.S. President Donald Trump and the imposition of temporary tariffs reveals: behind the political theater, a realignment of global currency markets is underway—akin to the Plaza Accord of 1985, when the G5 states corrected the overvaluation of the dollar to rebalance trade flows. The U.S. is no longer willing to tolerate the structural overvaluation of its currency—a consequence of its role as the world’s reserve currency. Trump made it clear: the days of bleeding out American industry in favor of foreign production sites are over.
Trump’s tariff offensive targets not just China. A reordering of trade flows via currency mechanisms between the two superpowers seems inevitable, as the damage from further escalation would be too great. But Trump’s real focus lies on the European Union—as he has repeatedly and unmistakably stated. “We have a deficit of $350 billion [with the EU]. They don’t buy our cars, nor our agricultural products,” Trump said of transatlantic trade.
These relations increasingly suffer under hidden trade barriers, harmonization mandates, and Europe’s norm-protectionism. Trump has called the EU a “tough nut to crack” in establishing fair trade relations. Notably, 75 percent of EU member states’ customs revenues flow directly into the European Commission’s budget under Ursula von der Leyen.
Carefully concealed under slogans like the “Green New Deal” or the mobility transition, the EU runs a subsidy engine rivaling China’s interventionist model. The protectionism vigorously defended by European actors falls squarely into this category.
Over time, the EU has developed an incentive structure fiercely shielded from external competition. When Trump refers to a “tough nut,” he means this corporatist complex—the alliance of powerful industrial interests, centralized governance from Brussels, and the defense of the single market via a wall of non-tariff barriers.
The Bretton Woods Agreement
The Bretton Woods agreement established a currency exchange regime system in 1944, following years of negotiations among 44 nations. This system required a currency peg to the U.S. dollar which was in turn pegged to the price of gold. The Bretton Woods system ultimately would go on to collapse in the 1970s. The Bretton Woods agreement also established institutions such as the International Monetary Fund and the World Bank, both of which continue to play an important role in the financial world today.
In 1971, concerned that the U.S. gold supply was no longer adequate to cover the number of dollars in circulation, President Richard M. Nixon devalued the U.S. dollar relative to gold. After a run on the gold reserve, he declared a temporary suspension of the dollar’s convertibility into gold.
By 1973, the Bretton Woods system had collapsed. Countries were then free to choose any exchange arrangement for their currency, except pegging its value to the price of gold. They could, for example, link its value to another country's currency, or a basket of currencies, or simply let it float freely and allow market forces to determine its value relative to other countries' currencies.
The Bretton Woods agreement remains a significant event in world financial history. The two Bretton Woods institutions it created in the International Monetary Fund and the World Bank, played an important part in helping to rebuild Europe in the aftermath of World War II.Subsequently, both institutions have continued to maintain their founding goals while also transitioning to serve global government interests in the modern day.
Is the Bretton Woods Agreement Still in Effect?
The Bretton Woods system—which required a currency peg to the U.S. dollar and linked the value of the dollar to gold—is no longer in effect. In the 1960s, the dollar had struggled within the system set up under the Bretton Woods agreement. In 1971, President Nixon suspended its convertibility into gold. Today, currencies float against each other, rather than being kept at firm pegs.
What Is the Difference Between the Gold Standard and the Bretton Woods System?
The gold standard refers to any monetary system in which the value of currency is linked to gold. Currently, there are no countries that use the gold standard.
Under the Bretton Woods system, the U.S. was originally convertible to gold at a rate of $35 per ounce. By 1971, this convertibility was severed.
Lessons of the post-Bretton Woods era
Exchange rate coordination in the post-Bretton Woods era has been a process of trial and error. Consensus has emerged only under the pressure of events, when uncoordinated economic policies led to massive exchange rate misalignments and domestic tensions, or when attempts at exchange rate stabilization failed.
This trial-and-error process is best illustrated by the policy shift in the United States in the mid-1980s. The first Reagan administration pursued a policy of laissez-faire on exchange rate markets. By February 1985, however, the dollar had jumped to so high a level and the U.S. trade deficit was so large that the United States decided to take action. Under the terms of the Plaza agreement, signed on September 11, 1985, the finance ministers and central bank governors of the United States, France, Germany, Japan, and the United Kingdom agreed to talk the dollar down and cooperate more closely.
A second agreement was reached at the Tokyo summit in May 1986, when the finance ministers of the large industrial countries, asked to collectively review their economic objectives and forecasts, drew up a list of indicators (including GNP growth rates, inflation rates, interest rates, unemployment rates, fiscal deficit ratios, current account and trade balances, monetary growth rates, reserves, and exchange rates) that have served as the tools for coordinating economic policy ever since.
By the end of 1986, the dollar had depreciated, and the United States and Japan agreed to stabilize the dollar-yen parity. Their agreement was formalized in a multilat-eral framework—the first Louvre accord, signed on February 21-22, 1987—that secretly established a narrow intervention grid for the currencies of the Group of Seven countries. The agreement worked well for some time; however, international commitment to it eventually waned. Germany raised interest rates in 1990, following reunification, while the United States eased monetary policy to counteract a decline in economic activity. Although the interest rate differentials between the United States and Europe caused several European currencies to appreciate, the Group of Seven did not react. Nor did it try to halt depreciation of the yen in 1990. By 1993, the Louvre accord was virtually dead, as domestic objectives took priority over internationally agreed targets. Political shocks (such as German reunification and the invasion of Kuwait) and economic facts (such as the persistence of Japan's current account surplus in spite of a strong yen) also weakened commitment to the accord. The Group of Seven's approach changed from "high-frequency" to "low-frequency" activism, with ad hoc interventions only in cases of extreme misalignment, and the focus shifted from exchange rate levels to exchange rate volatility.
Fine-tuning exchange rates is neither feasible nor desirable, if only because the exchange rate is an important instrument for market-driven macroeconomic adjustment. The rise and fall of the U.S. current account deficit in the 1980s showed that a flexible exchange rate could play a significant role in adjustment, even though the parallel rise of the Japanese surplus showed that this role should not be overstated. Furthermore, the commitment to policy coordination promised by the Plaza and Louvre arrangements was unrealistic for political reasons, given the difficulty large, relatively closed economies have in maintaining a constituency for external stability. There is no room for another Bretton Woods in today's economic and political environment.
For the same reasons, target zones, although they may have some value for emerging economies, are not a practical alternative for large economies. On the one hand, intervention margins need to be narrow to be stabilizing. On the other, large asymmetric shocks or market tensions may occur, making it politically costly either to change or to defend the exchange rate. To survive, target zones need to be relatively wide, in which case they become variants of floating exchange rates.
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