Disinflation, Crisis, and Global Imbalances, Thomas Wheat

Disinflation and the Recession Late 1979 Fed Chairman Volcker announces change in U.S. monetary policy 1980 – Ronald Reagan elected on anti- inflation 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