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Policy Brief 12-19

Combating Widespread Currency Manipulation

by Joseph E. Gagnon, Peterson Institute for International Economics

July 2012

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Widespread currency manipulation, mainly in developing and newly industrialized economies, is the most important development of the past decade in international financial markets. In an attempt to hold down the values of their currencies, governments are distorting capital flows by around $1.5 trillion per year. The result is a net drain on aggregate demand in the United States and the euro area by an amount roughly equal to the large output gaps in the two economies. In other words, millions more Americans and Europeans would be employed if other countries did not manipulate their currencies and instead achieved sustainable growth through higher domestic demand. Gagnon identifies the 20 most egregious currency manipulators over the past 11 years. Four groups of countries stand out: (1) longstanding advanced economies such as Japan and Switzerland; (2) newly industrialized economies such as Israel, Singapore, and Taiwan; (3) developing Asian economies such as China, Malaysia, and Thailand; and (4) oil exporters such as Algeria, Russia, and Saudi Arabia.

Although currency manipulation to boost trade balances is a violation of the Articles of Agreement of the International Monetary Fund (IMF), there is currently no procedure to punish or curtail it. The best forum for sanctions against currency manipulators is the World Trade Organization, operating in consultation with the IMF. Countries affected by currency manipulation would be authorized to impose tariffs on imports from manipulators. In order to get manipulators to agree to this change in international rules, the main targets of currency manipulation—the United States and the euro area—may have to play tough. One strategy would be to tax or otherwise restrict purchases of US and euro area financial assets by currency manipulators.


 

RELATED INTERVIEWS

Currency Manipulation: It's Not Just China July 17, 2012

Global Conflict over Exchange Rates, Part I August 17, 2012

Global Conflict over Exchange Rates, Part II August 20, 2012

Global Conflict over Exchange Rates, Part III August 21, 2012


RELATED LINKS

Peterson Perspective: Currency Manipulation: It's Not Just China July 17, 2012

Policy Brief 14-16: Estimates of Fundamental Equilibrium Exchange Rates, May 2014 May 2014

Policy Brief 14-17: Alternatives to Currency Manipulation: What Switzerland, Singapore, and Hong Kong Can Do June 2014

Policy Brief 13-28: Stabilizing Properties of Flexible Exchange Rates: Evidence from the Global Financial Crisis November 2013

Op-ed: Unconventional Monetary Policy: Don't Shoot the Messenger November 14, 2013

Op-ed: Misconceptions About Fed's Bond Buying September 2, 2013

Working Paper 13-2: The Elephant Hiding in the Room: Currency Intervention and Trade Imbalances March 2013

Policy Brief 12-25: Currency Manipulation, the US Economy, and the Global Economic Order December 2012

Working Paper 12-19: The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go? October 2012
Revised August 2013

Policy Brief 12-7: Projecting China's Current Account Surplus April 2012

Working Paper 12-4: Spillover Effects of Exchange Rates: A Study of the Renminbi March 2012

Book: Flexible Exchange Rates for a Stable World Economy October 2011

Policy Brief 10-24: The Central Banker's Case for Doing More October 2010

Policy Brief 10-26: Currency Wars? November 2010

Book: Debating China's Exchange Rate Policy April 2008