Category Archives: exchange rates

Undervalued Asian currencies

Share Button

August 17 – Observers of international monetary economics have shifted attention back to the exchange rates of Asian currencies.  The concern is that China’s yuan, Japan’s yen and Korea’s won are undervalued.  All three countries run trade and current account surpluses, at a time when the US is running corresponding deficits.  But given the fundamentals that keep US interest rates higher than the three Asians’, foreign exchange intervention is unlikely to be helpful.

  1. Three Asian currencies

Brad Setser has recently argued that, “The world should not ignore China’s undervalued currency”, while Gopinath, Gourinchas and Rey have responded that the US-China exchange rate is not the root cause of current account imbalances and does not warrant action by other countries.  Should Beijing be internationally pressured to push its yuan upwards, as Donald Trump has long argued?  (The People’s Bank of China used to intervene in the foreign exchange market to impede an appreciation. It stopped doing that in 2014, and started intervening to impede depreciation.) read more

Share Button

Elections and Devaluations

Share Button

May 2, 2024 — Lots of countries are voting.  Recent elections in a number of Emerging Market and Developing Economies (EMDEs) have demonstrated anew the proposition that major currency devaluations are more likely to come immediately after an election, rather than before one. Nigeria, Turkey, Argentina, Egypt, and Indonesia are five countries that have experienced post-election devaluations within the last year.

  1. The election-devaluation cycle

Economists will recall a 50-year-old paper by Nobel Prize winning professor Bill Nordhaus as essentially initiating research on the Political Business Cycle (PBC).  The PBC refers to governments’ general inclination towards fiscal and monetary expansion in the year leading up to an election, in hopes of re-electing the incumbent president or at least the incumbent party.  The idea is that growth in output and employment will accelerate before the election, boosting the government’s popularity, whereas the major costs in terms of debt troubles and inflation will come after the election. read more

Share Button

Fifty Years of Floating

Share Button

March 26, 2023 —  This month marks the 50th anniversary of the date, in March 1973, when the dollar, yen, deutschemark, pound, and other major currencies went untethered, their relative values to be determined thenceforth by foreign exchange markets rather than by governments.  The abandonment of the Bretton Woods system of fixed exchange rates was generally viewed as a policy failure. The movement from fixed to flexible exchange rates, however, was better viewed as part of a natural long-term process. read more

Share Button