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The Elephant Hiding in the Room: Currency Intervention and Trade Imbalances

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  • Joseph E. Gagnon

    ()
    (Peterson Institute for International Economics)

Abstract

Official purchases of foreign assets--a broad definition of currency intervention--are strongly correlated with current account (trade) imbalances. Causality runs in both directions, but statistical analysis using instrumental variables reveals that the effect of official asset purchases on current accounts is very large. A country’s current account balance increases between 60 and 100 cents for each dollar spent on intervention. This is a much larger effect than is widely assumed. These results raise serious questions about the efficiency of international financial markets.

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Bibliographic Info

Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP13-2.

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Date of creation: Mar 2013
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Handle: RePEc:iie:wpaper:wp13-2

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Keywords: current account; financial flows; foreign exchange reserves;

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  1. Chinn, Menzie David & Ito, Hiro, 2005. "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," Santa Cruz Department of Economics, Working Paper Series qt5pv1j341, Department of Economics, UC Santa Cruz.
  2. Edwin M. Truman, 2011. "Sovereign Wealth Funds: Is Asia Different?," Working Paper Series WP11-12, Peterson Institute for International Economics.
  3. Menzie D. Chinn & Hiro Ito, 2008. "Global Current Account Imbalances: American Fiscal Policy versus East Asian Savings," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 479-498, 08.
  4. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004," CEPR Discussion Papers 5644, C.E.P.R. Discussion Papers.
  5. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
  6. Reinhardt, Dennis & Ricci, Luca Antonio & Tressel, Thierry, 2013. "International capital flows and development: financial openness matters," Bank of England working papers 472, Bank of England.
  7. Gruber, Joseph W. & Kamin, Steven B., 2007. "Explaining the global pattern of current account imbalances," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 500-522, June.
  8. Tamim Bayoumi & Christian Saborowski, 2012. "Accounting for Reserves," IMF Working Papers 12/302, International Monetary Fund.
  9. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  10. Calista Cheung & Davide Furceri & Elena Rusticelli, 2013. "Structural and Cyclical Factors behind Current Account Balances," Review of International Economics, Wiley Blackwell, vol. 21(5), pages 923-944, November.
  11. Jerry Hausman, 2001. "Mismeasured Variables in Econometric Analysis: Problems from the Right and Problems from the Left," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 57-67, Fall.
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Cited by:
  1. Steiner, Andreas, 2014. "Current account balance and dollar standard: Exploring the linkages," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 65-94.
  2. Tamim Bayoumi & Christian Saborowski, 2012. "Accounting for Reserves," IMF Working Papers 12/302, International Monetary Fund.

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