The threat of 'currency wars': a European perspective

2010

The 'currency war', as it has become known, has three aspects: 1) the inflexible pegs of undervalued currencies; 2) recent attempts by floating exchange-rate countries to resist currency appreciation; 3) quantitative easing. Europe should primarily be concerned about the first issue, which relates to the renewed debate about the international monetary system. The attempts of floating exchange-rate countries to resist currency appreciation are generally justified while China retains a peg. Quantitative easing cannot be deemed a 'beggar-thy-neighbour' policy as long as the Fed's policy is geared towards price stability. Current US inflationary expectations are at historically low levels. Central banks should come to an agreement about the definition of price stability at a time of deflationary pressures. The euro's exchange rate has not been greatly impacted by the recent currency war; the euro continues to be overvalued, but less than before.

Economic Premise n.43, 2010

An energetic debate on the danger of a global currency war has flared up in recent months, stoked by a renewed move to “quantitative easing” in the United States, resurgent capital flows to developing countries and strong upward pressure on emerging market currencies. This Economic Premise reviews some of the arguments and concludes that the current U.S. monetary easing is a useful insurance policy against the risk of global deflation. But it is increasing pressure on developing countries to move toward greater monetary policy autonomy and exchange rate flexibility, as well as to undertake the institutional and structural policies needed to underpin such flexibility. Such reforms will take time.

Abstract Forthcoming in Review of International Political Economy 2014 Pre-print version Manuela Moschella [email protected] The purpose of this paper is to shed light on how advanced economies reacted to large post-crisis capital inflows. Focusing on the Swiss case, the paper shows that capital controls do not exhaust the list of unorthodox policies adopted since the start of the crisis. The revival of foreign exchange interventions and the introduction of explicit exchange rate targets also figure prominently in this list as attested by the decisions adopted by the Swiss National Bank (SNB) since 2009. Why did the SNB decide to intervene in the forex market and introduce an exchange rate floor? Why did the SNB decide to gamble with its highly-valued anti-inflationary reputation in its attempt to stem the rise of the franc? In answering these questions, this paper suggests a broader and more complete explanation than one which focuses solely on the configuration of domestic interests. Specifically, the paper argues that a thorough explanation of the SNB’s response requires taking into account the changing monetary paradigm of the central banking community. This emerging monetary paradigm influenced the SNB’s policy decisions, as it made the SNB particularly sensitive to financial stability risks and provided the central bank with the (macroprudential) tools to manage them. Keywords: currency wars; monetary policy; exchange rate policy; central banking; ideational change; Switzerland.

Entrepreneurial Business and Economics Review, 2014

The main aim of this article is to identify factors influencing the direction of change in exchange rates and to assess whether it is justifiable to use the term "currency wars" to describe such activities. The main forms of such "currency wars" in contemporary global economy have been characterized and their impact on financial markets and national economies has been analyzed. Research Design & Methods: The method chosen for verification of the hypothesis is the critical analysis of existing literature regarding currency wars. The article also takes advantage of the experiences connected with exchange rate fluctuations in several developed and developing countries in the years 2000-2014. The cases subjected to analysis include changes in currency markets in the USA,

The main objective of this paper is to discern where the Eurozone (EZ) stands within the current framework of increased ‘currency wars’ between the US and China, and whether it is able and willing to change the current International Monetary System (IMS) to a more coordinated and managed exchange rate regime. The answer is that the EZ has made certain progress in the latter two faces of monetary power, focused on preference-shaping and agenda-setting, but as yet not in the first face where decision-making takes actually place. France, for instance, has certainly made some efforts, with the support of China, to start the debate on the transformation of the current flexible-dollar-standard (FDS). On the back of the ideational effect of European Monetary Union (EMU) and the internationalisation process of the euro, the Europeans have gained enough leverage to make considerable impact in the second and third faces of power. However, by not being politically united, the EZ precludes any possibility to force the US to enter into a compromise and relinquish the exorbitant privilege that the centrality of the dollar offers them.

Global Monetary Governance, 2007

−2− Geopolitics, the dictionary tells us, is about international great-power rivalries-the struggle for dominance among territorially defined states. Conflict is at the heart of geopolitics. Geopolitical relations are dynamic, strategic, and hierarchical. In geopolitics, the meek definitely do not inherit the earth. Today, much the same can be said about currencies, which in recent years have become increasingly competitive on a global scale. Monetary relations, too, have become conflictual and hierarchical; and the meek are similarly disadvantaged. At issue is a breakdown of the neat territorial monopolies that national governments have historically claimed in the management of money, a market-driven process that elsewhere I have described as the deterritorialization of money (Cohen 1998, 2003a). In lieu of monopoly, what we have now is more like oligopoly-a finite number of autonomous suppliers, national governments, all vying ceaselessly to shape and manage demand for their respective currencies. Since state are no longer able to exercise supreme control over the circulation and use of money within their own frontiers, they must instead do what they can to preserve or promote market share. As a result, the population of the monetary universe is becoming ever more stratified, assuming the appearance of a vast Currency Pyramid-narrow at the top, where the strongest monies dominate; and increasingly broad below, reflecting varying degrees of competitive inferiority. What are the geopolitical implications of this new geography of money? At present, one currency stands head and shoulders above the rest-the U.S. dollar, familiarly known as the greenback. The dollar is the only truly global currency, used for all the familiar purposes of moneymedium of exchange, unit of account, store of value-in virtually every corner of the world. From its dominant market share, the United States gains significant economic and political advantages. The question is: Can the dominance of the dollar be challenged? The answer comes in two partsfirst, if we look to the logic of market competition; and second, if we factor in government preferences as well. Looking to the logic of market competition alone, the answer is clear. The dollar will continue to prevail. Presently, only two other currencies are used at all widely outside their countries of issue. These are the euro, the new joint money of the European Union (EU), and the Japanese yen. Together, these are the Big Three of currency geopolitics. But neither the euro nor the yen, I submit, poses a serious competitive threat to the greenback in today's global marketplace. Once we factor in government preferences, however, the outlook becomes cloudier. That the Europeans and Japanese will do all they can to sustain the market appeal of their currencies may be taken for granted. But whether they will go further, to seek formation of organized monetary blocs with foreign governments, is less certain. Japan may well to seek to challenge the dollar's present dominance in East Asia; likewise, Europe could be tempted to make a battleground of the Middle East. Neither, however, is likely to carry currency confrontation with the United States to the point where it might jeopardize more vital political and security interests. Mutual restraint among the Big Three would appear to be the safest bet. I. The Dollar

The exchange rate is the most important price in any economy, for it affects all other prices. In most countries, policy toward the national currency is prominent and controversial. Economic epochs are often characterized by the prevailing exchange rate system-the Gold Standard Era, the Bretton Woods Era. Contemporary developments, from the creation of an Economic and Monetary Union in Europe to successive waves of currency crises, reinforce the centrality of exchange rates to economic trends.

s Abstract The structure of international monetary relations has gained increasing prominence over the past two decades. Both national exchange rate policy and the character of the international monetary system require explanation. At the national level, the choice of exchange rate regime and the desired level of the exchange rate involve distributionally relevant tradeoffs. Interest group and partisan pressures, the structure of political institutions, and the electoral incentives of politicians therefore influence exchange rate regime and level decisions. At the international level, the character of the international monetary system depends on strategic interaction among governments, driven by their national concerns and constrained by the international environment. A global or regional fixed-rate currency regime, in particular, requires at least coordination and often explicit cooperation among national governments.

Exchange rates powerfully affect cross-border economic transactions. Trade, investment, finance, tourism, migration, and more are all profoundly influenced by international monetary policies. Many developing-country governments have searched for alternatives to the uncertainty that can prevail on international currency markets. Policy entrepreneurs have rushed to peddle currency nostrums, urging a turn toward dollarization, managed floating, nominal anchors, target bands, or other options.

International Economics and Economic Policy, 2012

Economists' faith that variable exchange rates benevolently equilibrate has been empirically disconfirmed. That faith is here tackled at its theoretical core with an exchange rate model that although ultra abstract, includes the undeniable fundamentals of market power and differential goals of central bankers and large-scale private players. It permits a game theoretic analysis under the assumption that all agents maximize their payoffs. The paper then relaxes the assumption of maximising agents, allowing for a more complex and thus realistic second version of the model that is interpretable within SKAT, the Stages of Knowledge Ahead Theory of risk and The text is written by Robin Pope, with valued improvements on successive drafts from comments of Johannes Kaiser and Reinhard Selten. The participants' instructions here reported are based on those written by Sebastian Kube and translated into English by Reinhard Selten, with minor improvements on these from Robin Pope. The calculations requested by Robin Pope were kindly furnished by Johannes Kaiser. The particular model within the central bank conflict co-operation theory of exchange rate determination is that of Robin Pope and Reinhard Selten, with valued input from Juergen von Hagen on allowing for the distinct input of the government sector. The operationalisation of the model into a computer-programmed set-up is uncertainty. In an experimental setting, this second version of the model points to: a) the inability of agents in central banks, governments and the private real and financial sectors to operate in maximising ways; b) destructive central bank conflict; and c) the widely discrepant outcomes arising from the dynamics of individual personality differences. The paper's theoretical and empirical findings thus both point to the merits of a single world currency.