Disinflation, Crisis, and Global Imbalances, 1980

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Disinflation, Crisis, and Global
Imbalances, 1980 - 2008
Thomas Wheat
Disinflation and the 1981-1983
Recession
• Late 1979 Fed Chairman Volcker announces
change in U.S. monetary policy
• 1980 – Ronald Reagan elected on antiinflation platform
• U.S. Interest Rates Doubled between 1978 and
1981
Dollar appreciation
• Higher US Interest Rates lead to appreciating
US Dollar
• Appreciation not welcome abroad
• Second Oil Shock in throws World Economy in
Recession
Fiscal Policies, the Current Account,
and the Resurgence of Protectionism
• President Reagan lowers taxes and raised
defense spending
• By 1987 US a net debtor
• Strong US dollar leads to more imports and
increased unemployment in some sectors
Global Slump, Recovery, Crisis, and
Deficits
• Inflation in 1985 and 1986 leads to high in
inflation in 1987 and 1988 leading to
economic downturn in 1990
• US recovers in 1992 and grows through 1990’s
• Japan growth in 1996 and Government
response
The Plaza Accord
• Agreement between France, West Germany,
Japan, US, and UK to deflate USD vs. Yen
• Exchange Rate fell 51% between 1985 and
1987
• Reason’s for Plaza Accord: Reduce US account
deficit and help US economy emerge from
Depression
Global Imbalances and Real Interest
Rates in 2000’s
• US Real Interest Rates drop from 1997 – 2006
• US tax cuts in early 2000’s lead to larger deficit
• Interest Rate drops leading to more
American’s buying homes
• Change in investment behavior outside US
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