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Currency Wars?

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  • William R. Cline

    ()
    (Peterson Institute for International Economics)

  • John Williamson

    ()
    (Peterson Institute for International Economics)

Abstract

More than a dozen countries, including Brazil, China, India, Japan, and Korea, have been intervening in the foreign exchange market to prevent their currencies from appreciating. There are fears that the second dose of quantitative easing in the United States (dubbed QE2) may worsen currency appreciation. These developments raise the prospect of a currency war, which the Group of Twenty (G-20) fears is gathering steam. Because many countries are simultaneously seeking to improve their balance of payments position, many are seeking a more competitive exchange rate. The laws of mathematics mean that some must be disappointed: A weaker exchange rate of one country implies a stronger rate of some other country or countries. Cline and Williamson argue that any agreement reached at the G-20 summit in Seoul to prevent an exchange rate war should be based on a distinction between countries with overvalued and undervalued currencies. Any accord should be designed to seek appreciation of the latter but not to debar the former from taking actions to prevent their currencies from becoming even more overvalued. Countries that are already overvalued on an effective basis--primarily floating emerging-market economies, but also Australia and New Zealand--should not be condemned for resisting further appreciation. But if a currency is substantially undervalued and the country is aggressively engaging in intervention to prevent appreciation, it is reasonable to judge that its intervention is unjustifiable. The authors show that a handful of high-surplus economies are intervening in such a fashion: China, Hong Kong, Malaysia, Singapore, Switzerland, and Taiwan. The currencies of these economies are substantially undervalued, and their current account surpluses are correspondingly excessive, pointing clearly to the desirability of currency revaluation by these countries. It would be very wrong for the G-20 to condemn all countries that are trying to prevent their exchange rates from appreciating. One needs to ask which currencies are undervalued and concentrate on preventing them from intervening and tightening capital controls.

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Paper provided by Peterson Institute for International Economics in its series Policy Briefs with number PB10-26.

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Date of creation: Nov 2010
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Handle: RePEc:iie:pbrief:pb10-26

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Cited by:
  1. Allegret, Jean-Pierre & Sallenave, Audrey, 2014. "The impact of real exchange rates adjustments on global imbalances: A multilateral approach," Economic Modelling, Elsevier, vol. 37(C), pages 149-163.
  2. Saadaoui, Jamel, 2012. "Déséquilibres globaux, taux de change d’équilibre et modélisation stock-flux cohérente
    [Global Imbalances, Equilibrium Exchange Rates and Stock-Flow Consistent Modelling]
    ," MPRA Paper 51332, University Library of Munich, Germany.
  3. Naude, Wim, 2009. "The Global Economic Crisis after One Year: Is a New Paradigm for Recovery in Developing Countries Emerging?," Working Paper Series UNU-WIDER UNU Policy Brie, World Institute for Development Economic Research (UNU-WIDER).
  4. Jamel Saadaoui, 2011. "Exchange Rate Dynamics and Fundamental Equilibrium Exchange Rates," Post-Print halshs-00593674, HAL.
  5. Gemma Mabin, 2010. "New Zealand's Exchange Rate Cycles: Evidence and Drivers," Treasury Working Paper Series 10/10, New Zealand Treasury.
  6. Yao, Yang, 2014. "The Chinese Growth Miracle," Handbook of Economic Growth, in: Handbook of Economic Growth, edition 1, volume 2, chapter 7, pages 943-1031 Elsevier.

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