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Currency Manipulation versus Current Account Manipulation

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Author Info

  • Junning Cai

    (University of Hawaii at Manoa)

Abstract

It is said that a country’s currency peg can become currency manipulation representing protracted government intervention in the foreign exchange market that gives it unfair competitive advantage in international trade yet prevents effective balance of payments in its trade partners. Regarding this widespread fallacy, this paper explains why currency peg is not currency manipulation even when it keeps a country’s currency undervalued. We clarify that 1) government is inherently a major player in the financial market and hence “no protracted intervention” is a meaningless guideline for designating currency manipulation; 2) exchange rate flexibility is neither a sufficient nor a necessary condition for fixing current account imbalance and hence currency peg would not prevent effective current account adjustments; and 3) as far as causing “unfair” trade advantage is concerned, currency peg is less guilty than the attempt to prevent or fix current account imbalance; and obligating a country to adjust its currency to accommodate its trade partners’ current account management would unfairly impair this country’s trade advantage.

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File URL: http://128.118.178.162/eps/if/papers/0510/0510023.pdf
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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0510023.

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Length: 59 pages
Date of creation: 24 Oct 2005
Date of revision:
Handle: RePEc:wpa:wuwpif:0510023

Note: Type of Document - pdf; pages: 59
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Web page: http://128.118.178.162

Related research

Keywords: currency manipulation; current account; exchange rate; RMB controversies;

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References

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  1. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?," NBER Working Papers 11541, National Bureau of Economic Research, Inc.
  2. Michael Dooley & David Folkerts-Landau & Peter Garber, 2005. "An essay on the revived Bretton Woods system," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
  3. Jeffrey A. Frankel & C. Fred Bergsten & Michael L. Mussa, 1994. "Exchange Rate Policy," NBER Chapters, in: American Economic Policy in the 1980s, pages 293-366 National Bureau of Economic Research, Inc.
  4. Eichengreen, Barry, 2004. "Chinese Currency Controversies," CEPR Discussion Papers 4375, C.E.P.R. Discussion Papers.
  5. Frankel, Jeffrey, 2004. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adustment under a Flexible Rate," Working Paper Series rwp04-037, Harvard University, John F. Kennedy School of Government.
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Cited by:
  1. Bonpasse, Morrison, 2009. "The single global currency - common cents for the world (2008 Edition)," MPRA Paper 14756, University Library of Munich, Germany.
  2. Bonpasse, Morrison, 2006. "The Single Global Currency: Common Cents for the World," MPRA Paper 1175, University Library of Munich, Germany.

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