Working Paper: NBER ID: w14600
Authors: Robert W. Staiger; Alan O. Sykes
Abstract: Central bank intervention in foreign exchange markets may, under some conditions, stimulate exports and retard imports. In the past few years, this issue has moved to center stage because of the foreign exchange policies of China. China has regularly intervened to prevent the RMB from appreciating relative to other currencies, and over the same period has developed large global and bilateral trade surpluses. Numerous public officials and commentators argue that China has engaged in impermissible "currency manipulation," and various proposals for stiff action against China have been advanced. \n \nThis paper clarifies the theoretical relationship between exchange rate policy and international trade, and addresses the question of what content can be given to the concept of "currency manipulation" as a measure that may impair the commitments made in trade agreements. Our conclusions are at odds with much of what is currently being said by proponents of counter-measures against China. For example, it is often asserted that China's currency policies have real effects that are equivalent to an export subsidy. In fact, however, if prices are flexible the effect of exchange rate intervention parallels that of a uniform import tariff and export subsidy, which will have no real effect on trade, an implication of Lerner's symmetry theorem. With sticky prices, the real effects of exchange rate intervention and the translation of that intervention into trade-policy equivalents depend critically on how traded goods and services are priced. The real effects of China's policies are potentially quite complex, are not readily translated into trade-policy equivalents, and are dependent on the time frame over which they are evaluated (because prices are less "sticky" over a longer time frame).
Keywords: Currency manipulation; International trade; Exchange rate policy
JEL Codes: F02; F13; F31; K33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Central bank intervention in foreign exchange markets (F31) | stimulate exports (F10) |
| Central bank intervention in foreign exchange markets (F31) | retard imports (F14) |
| Currency policies may create effects akin to export subsidies (F31) | effects on trade flows (F69) |
| Currency policies may create effects akin to import tariffs (F31) | effects on trade flows (F69) |
| Pricing of traded goods and services (D49) | real effects of exchange rate intervention (F31) |
| Long-term price flexibility (D41) | effects of exchange rate policies (F31) |