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Currency Manipulation

Author

Listed:
  • Weithing Zhang

    (University of Chicago)

  • Thomas Mertens

    (New York University)

  • Tarek Hassan

    (The University of Chicago)

Abstract

Many central banks manage the stochastic behavior of their currencies' exchange rates by imposing pegs relative to a target currency. We study the effects of such currency manipulation in a multi-country model of exchange rate determination with endogenous capital accumulation. We find that the imposition of an exchange rate peg relative to a given target currency increases the volatility of consumption in the target country and decreases the volatility of the target currency's exchange rate relative to all other currencies in the world. In addition, currency pegs affect the formation of capital across sectors and countries. For example, an economically smaller country (such as Saudi Arabia) pegging its currency to an economically large country (such at the U.S.) decreases capital accumulation in the larger country and increases its real and nominal interest rate

Suggested Citation

  • Weithing Zhang & Thomas Mertens & Tarek Hassan, 2014. "Currency Manipulation," 2014 Meeting Papers 401, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:401
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    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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