The art of currency manipulation: how to profiteer by deliberately distorting exchange rates

Kaushik Basu

No 6608, Policy Research Working Paper Series from The World Bank

Abstract: A frequent charge in foreign exchange markets in developing countries is that of manipulators being at work. Since to buy is to raise prices and to sell is to lower prices, the question that naturally arises is whether the widespread charge of market manipulation is valid. The paper shows that (whether or not"widespreadness"has any merit) it is possible for a player to manipulate and profiteer. By using some simple principles of game theory, the paper outlines a strategy that a manipulator may use. The aim of this paper is not to provide a manual for the manipulator but to enable the regulator to understand the art and develop policies to curb manipulation.

Keywords: Markets and Market Access; Emerging Markets; Debt Markets; Currencies and Exchange Rates; Economic Theory&Research (search for similar items in EconPapers)
Date: 2013-09-01
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