Abstract
The term “currency manipulator” has been used by the United States to describe the monetary practices of nations such as China and Japan and by Germany to describe U.S. monetary policy. This charge transcends monetary regimes and includes both traditional monetary policy and that in the service of industrial or developmental strategies that center on export led growth. While the latter clearly has a negative effect on employment and economic growth in the rest of the world, the increased international mobility of capital, combined with the wide-spread use of flexible exchange rates, has led to the same external effects from the normal conduct of monetary policy. Acknowledging and dealing with these negative external effects will lead to improved and less tension-filled international economic relations than calling nations “currency manipulators.”.
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Notes
Despite accusations, it has been 19 years since the United States designated any country as a currency manipulator. China bore this label between 1992 and 1994. In its April 12, 2013 semi-annual report on currency practices, the United States warned Japan against depreciating the yen to gain a trading advantage.
For several years, Schauble has accused the U.S. of economic hypocrisy: “It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar rate artificially lower with the help of their [central bank’s] printing press.” Financial Times, November 7, 2010.
Typical of the changes that might occur are those in tastes and preferences between current and future consumption and between domestic goods and services and foreign substitutes, changes in technology, changes in relative prices, changes in fiscal policy, etc.
Produced, for example, by changes in technology or a more rapid rate of capital formation.
That is, since the focus country would have imported more goods, it would also have to export more goods and these exports would have a negative effect on the import substitute industries in the rest of the world.
See Johnson (1969): pp. 12–13.
The 1950s and 1960s were years in which international capital flows were both small and subject to exchange controls. Friedman’s advocacy of flexible exchange rates may also have been influenced by the fact that Monetarism will only work in a flexible exchange rate regime. A constant growth rate rule for the money supply requires autonomy for the central bank that is incompatible with fixed rate regimes.
Excluded from this discussion is that monetary policy changes that affect the real exchange rate will likely affect the terms of trade for a nation and, therefore, its material well being.
Other changes were made, however. In particular, that the dollar centered system embodied in Bretton Woods worked substantially in America’s favor and minimized the role played by the balance of payments in constraining its monetary and fiscal policy choices.
Note that after the shift in fiscal policy, the focus country will have a twin deficit: budget and current account.
According to a 2012 compilation by the IMF, 66 countries have either adopted the dollar as legal tender, pegged their currencies to it or manage their exchange rates against it. The IMF estimates that the collective GDP of these countries is $9 trillion, or 14 % of the world GDP. A smaller group of 25 countries have similar relations with the euro.
China’s nominal exchange rate with the dollar is better characterized as a de facto moveable peg. Between June 2010 and March 2013, the yuan appreciated by about 10 % in nominal terms and 16 % in real terms. The U.S. Treasury continues to assert that it remains substantially undervalued.
Bergsten, Washington Post, April 21, 2013, pp. G1–G2. Bergsten and Gagnon (2012) identify 22 countries, accounting for 31 % of global GDP, as currency manipulators.
See The Conscience of a Liberal, blog, NYTimes.com, October 22, 2012.
The decline in interest rates also produces a wealth effect that has a positive effect on spending not only in the focus country but in others as well.
In some text book presentations of the open economy, the effect on the rest of the world is neglected by assuming what is called the “small country” cases. Thus, there are no external effects from a shift in monetary policy by the small country and the world interest rate remains unaffect by its action (and, thus, no wealth effect on spending).
There is ample evidence that monetary policy in the United States can be described as adhering to the Taylor Rule. The exchange rate is not a policy variable in this guide to monetary policy.
There is also another important difference. Setting exchange rates as a part of an industrial or development strategy that favors certain sectors over others can involve large inefficiencies. The normal operation of monetary policy allows the market to allocate capital.
It is of course well known that countercyclical fiscal policy does not work well in a flexible exchange rate regime with high capital mobility since its crowding-out effect is both large and heavily concentrated in the foreign trade sector.
The Japanese central bank may have the option of purchasing private sector securities. But their yield is also low and, if it could be reduced, would set in motion the same portfolio choices that would negatively affect Japan’s trading partners. Buying private sector securities is not a way around this difficulty.
References
Bergsten, C. Fred and Gagnon, Joseph E. Currency Manipulation, the US Economy, and the Global Economic Order. Policy Brief. Peterson Institute for International Economics, Number PB12-25 (December 2012).
Friedman, M. (1953). “The case for flexible exchange rates,” Essays in Positive Economics. University of Chicago Press pp. 157–203.
Johnson, H. G. (1969) “The case for flexible exchange rates, 1969.” Review, Federal Reserve Bank of St. Louis. pp. 12–24.
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The author is Adjunct Professor at the Georgetown University Institute of Public Policy. One of John Virgo’s goals in establishing the IAES was to promote international discussion of international issues. The title of this paper was selected to reflect that goal. If we understand the issues, maybe we wouldn’t have to accuse people of currency manipulation. Thanks John. The author would like to thank Robert Anderson, William Bomberger, Marc Labonte, Kurt Schuler, and Thomas Woodward for helpful comments on an earlier draft of this paper. The editorial assistance of Sally Craig is gratefully acknowledged.
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Makinen, G.E. Are Central Bankers Currency Manipulators?. Atl Econ J 41, 231–239 (2013). https://doi.org/10.1007/s11293-013-9375-1
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DOI: https://doi.org/10.1007/s11293-013-9375-1