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"Currency Manipulation" and World Trade

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  • Robert W. Staiger
  • Alan O. Sykes

Abstract

Central bank intervention in foreign exchange markets may, under some conditions, stimulate exports and retard imports. In the past few years, this issue has moved to center stage because of the foreign exchange policies of China. China has regularly intervened to prevent the RMB from appreciating relative to other currencies, and over the same period has developed large global and bilateral trade surpluses. Numerous public officials and commentators argue that China has engaged in impermissible "currency manipulation," and various proposals for stiff action against China have been advanced. This paper clarifies the theoretical relationship between exchange rate policy and international trade, and addresses the question of what content can be given to the concept of "currency manipulation" as a measure that may impair the commitments made in trade agreements. Our conclusions are at odds with much of what is currently being said by proponents of counter-measures against China. For example, it is often asserted that China's currency policies have real effects that are equivalent to an export subsidy. In fact, however, if prices are flexible the effect of exchange rate intervention parallels that of a uniform import tariff and export subsidy, which will have no real effect on trade, an implication of Lerner's symmetry theorem. With sticky prices, the real effects of exchange rate intervention and the translation of that intervention into trade-policy equivalents depend critically on how traded goods and services are priced. The real effects of China's policies are potentially quite complex, are not readily translated into trade-policy equivalents, and are dependent on the time frame over which they are evaluated (because prices are less "sticky" over a longer time frame).

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14600.

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Date of creation: Dec 2008
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Publication status: published as Staiger, Robert W. & Sykes, Alan O., 2010. "‘Currency manipulation’ and world trade," World Trade Review, Cambridge University Press, vol. 9(04), pages 583-627, October.
Handle: RePEc:nbr:nberwo:14600

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  1. Agur Itai, 2008. "The US Trade Deficit, the Decline of the WTO and the Rise of Regionalism," Global Economy Journal, De Gruyter, vol. 8(3), pages 1-34, September.
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  7. Rogoff, Kenneth, 2007. "Global imbalances and exchange rate adjustment," Journal of Policy Modeling, Elsevier, vol. 29(5), pages 705-709.
  8. Feenstra, Robert C, 1985. "Anticipated Devaluations, Currency Flight, and Direct Trade Controls in a Monetary Economy," American Economic Review, American Economic Association, vol. 75(3), pages 386-401, June.
  9. Gary Clyde Hufbauer & Yee Wong & Ketki Sheth, 2006. "US-China Trade Disputes: Rising Tides Rising Stakes," Peterson Institute Press: Policy Analyses in International Economics, Peterson Institute for International Economics, number pa78, November.
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Cited by:
  1. Emmanuel Farhi & Gita Gopinath & Oleg Itskhoki, . "Fiscal Devaluations," Working Paper 70976, Harvard University OpenScholar.
  2. Alessandro Nicita, 2013. "Exchange Rates, International Trade And Trade Policies," UNCTAD Blue Series Papers 56, United Nations Conference on Trade and Development.
  3. Jean-Christophe Bureau & Sébastien Jean, 2013. "Trade Liberalization in the Bio-Economy: Coping with a New Landscape," Working Papers 2013-15, CEPII research center.
  4. ´He, Xinhua & Qin, Duo & Liu, Yimeng, 2011. "Exchange rate misalignments: A comparison of China today against recent historical experiences of Japan, Germany, Singapore and Taiwan," BOFIT Discussion Papers 22/2011, Bank of Finland, Institute for Economies in Transition.
  5. Ramirez, Carlos D., 2013. "The political economy of “currency manipulation” bashing," China Economic Review, Elsevier, vol. 27(C), pages 227-237.
  6. Duo Qin & Xinhua He & Yimeng Liu, 2010. "Exchange Rate Misalignments: Historical Experience of Japan, Germany, Singapore and Taiwan Compared to China Today," Working Papers 667, Queen Mary, University of London, School of Economics and Finance.
  7. Rachel McCulloch, 2010. "The International Trading System and Its Future," Working Papers 08, Brandeis University, Department of Economics and International Businesss School.

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