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Currency Manipulation versus Current Account Manipulation

Junning Cai ()

International Finance from EconWPA

Abstract: It is said that a country’s currency peg can become currency manipulation representing protracted government intervention in the foreign exchange market that gives it unfair competitive advantage in international trade yet prevents effective balance of payments in its trade partners. Regarding this widespread fallacy, this paper explains why currency peg is not currency manipulation even when it keeps a country’s currency undervalued. We clarify that 1) government is inherently a major player in the financial market and hence “no protracted intervention” is a meaningless guideline for designating currency manipulation; 2) exchange rate flexibility is neither a sufficient nor a necessary condition for fixing current account imbalance and hence currency peg would not prevent effective current account adjustments; and 3) as far as causing “unfair” trade advantage is concerned, currency peg is less guilty than the attempt to prevent or fix current account imbalance; and obligating a country to adjust its currency to accommodate its trade partners’ current account management would unfairly impair this country’s trade advantage.

Keywords: currency manipulation; current account; exchange rate; RMB controversies (search for similar items in EconPapers)
JEL-codes: E52 F31 F32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-ifn and nep-mac
Date: 2005-10-24
Note: Type of Document - pdf; pages: 59
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpif:0510023

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