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Tuesday, January 05, 2016

'What Did You Do in the Currency War, Daddy?'

I recently gave a talk in Honolulu hosted by the Korean Institute of Economic Policy, and this was a heated topic of discussion. Koreas was criticized in the Treasury's semi-annual report on currency manipulation (though not formally identified a a manipulator), and I had the impression their criticism of US monetary policy was an attempt to say "see, you do it too." My defense of the US was not popular:

Ben Bernanke:

What did you do in the currency war, Daddy?: The financial crisis and its immediate aftermath saw close cooperation among the world’s policymakers, especially central bankers. For example, in October 2008, the Federal Reserve coordinated simultaneous interest-rate cuts with five other major central banks. It also established currency swap arrangements—in which the Fed provided dollars in exchange for foreign currencies—with fourteen foreign central banks, including four from emerging markets. However, once the crisis had passed and recovery begun, national economic interests began to diverge. In particular, some foreign policymakers argued that the Fed’s aggressive monetary policies, undertaken to support the U.S. economic recovery, were damaging their own economies.
Two criticisms were prominent, and a third perennial issue also reared its head. First, several foreign policymakers accused the Fed of engaging in “currency wars”—deliberately weakening the dollar to gain an advantage in trade. (The phrase is most closely associated with Brazilian finance minister Guido Mantega, who leveled the charge when the Fed began a second round of quantitative easing in November 2010.) A second complaint, raised prominently by Reserve Bank of India governor Raghuram Rajan, among others, was that shifts in Fed policy (toward either greater tightness or greater ease) were creating spillovers—sharp swings in capital flows and increased market volatility—that destabilized financial markets in emerging-market countries. This concern has surfaced again recently, as the Fed has initiated what may prove to be a series of interest-rate increases. ...

Skipping to the bottom line (after a long, detailed discussion):

Overall, I find little support for the claims that the Fed has engaged in currency wars. Although the Fed’s monetary policies of recent years likely put downward pressure on the dollar, the effect of the weaker dollar on US net exports was largely offset by the effects of higher US incomes on Americans’ demand for imported goods and services. Indeed, recent years have seen neither an increase in US net exports nor any sustained depreciation of the dollar.

    Posted by on Tuesday, January 5, 2016 at 01:20 PM in Economics, International Finance, Monetary Policy | Permalink  Comments (27)


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