NCPA - National Center for Policy Analysis

Currency Manipulation Affects Global Economic Recovery

February 16, 2015

Today\'s complex, interconnected global markets face new challenges due to currency manipulation tactics. Also known as "beggar-thy-neighbor" policies, countries sometimes make unilateral efforts to devalue their currencies against the currencies of their trade partners in order to improve competitiveness and increase their exports, because devaluation makes domestic goods cheaper than their foreign counterparts.

But while currency manipulation may improve a country's internal economy by creating domestic jobs, a new study by Arthur B. Laffer contends the long-term consequences of currency manipulation disrupt the global economy and delay financial recovery. Such consequences may include:

  • Economic distortions such as price instability and volatile domestic demand.
  • Decreased employment resulting from account imbalances.
  • Unstable macroeconomic events leading to growth and trade disparities.


Unlike the floating exchange rate system, which provides stability from changes in external inflation, currency devaluation leads to trade imbalances and has prevented the world from rebounding from the financial crisis, says Laffer.

Is there a solution to the negative effects of currency manipulation? Laffer says yes. By negotiating high-standard free trade agreements that address currency manipulation with the European Union and nations around the Pacific Ocean, the United States could avoid further harm from countries that have a history of undermining their trade partners.

Source: Arthur B. Laffer, "Currency Manipulation and the Distortion of Free Trade," Laffer Center, December 2014. 

 

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