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Currency Manipulation

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  • Tarek A. Hassan
  • Thomas M. Mertens
  • Tony Zhang

Abstract

We develop a novel, risk-based theory of the effects of currency manipulation. In our model, the choice of exchange rate regime allows policymakers to make their currency, and by extension, the firms in their country, a safer investment for international investors. Policies that induce a country's currency to appreciate when the marginal utility of inter- national investors is high lower the required rate of return on the country's currency and increase the world-market value of domestic firms. Applying this logic to currency stabilizations, we find a small economy stabilizing its bilateral exchange rate relative to a larger economy can increase domestic capital accumulation, domestic wages, and even its share in world wealth. In the absence of policy coordination, small countries optimally choose to stabilize their exchange rates relative to the currency of the largest economy in the world, which endogenously emerges as the world's “anchor currency.” Larger economies instead optimally choose to float their exchange rates. The model therefore predicts an equilibrium pattern of exchange rate arrangements that is remarkably similar to the one in the data.

Suggested Citation

  • Tarek A. Hassan & Thomas M. Mertens & Tony Zhang, 2016. "Currency Manipulation," NBER Working Papers 22790, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22790
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    Cited by:

    1. Rieth, Malte & Menkhoff, Lukas & Stöhr, Tobias, 2019. "The dynamic impact of FX interventions on financial markets," Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203504, Verein für Socialpolitik / German Economic Association.
    2. Kuersteiner, Guido M. & Phillips, David C. & Villamizar-Villegas, Mauricio, 2018. "Effective sterilized foreign exchange intervention? Evidence from a rule-based policy," Journal of International Economics, Elsevier, vol. 113(C), pages 118-138.

    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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