I’m still waiting for a definition of “currency manipulation”

Due to my recent move, I’m still catching up on the last few months in the blogosphere.  (Today I spent $750 (and many hours) registering my car in California.)  Thus I finally got around to reading an earlier post by David Glasner, which responds to my complaint that “currency manipulation” is an incoherent concept.  More specifically, I made this charge:

But I would go much further; there is no intellectually respectable definition of currency manipulation.

And David responded:

Well, my only response is that I consider Max Corden to be just about the most theoretically-respectable economist alive. So let me quote at length from Corden’s essay “Macroeconomic and Industrial Policies” reprinted in his volume Protection, Growth and Trade (pp. 288-301)

There is clearly a relationship between macroeconomic policy and industrial policy on the foreign trade side. . . . The nominal exchange rate is an instrument of macroeconomic policy, while tariffs, import quotas, export subsidies and taxes and voluntary export restraints can all be regarded as instruments of industrial policy. Yet an exchange-rate change can have “industrial” effects. It therefore seems useful to clarify the relationship between exchange-rate policy and the various micro or industrial-policy instruments.

The first step is to distinguish a nominal from a real exchange-rate change and to introduce the concept of “exchange-rate protection. . . . If the exchange rate depreciates to the same extent as all costs and prices are rising (relative to costs and prices in other countries) there may be no real change at all. The nominal exchange rate is a monetary phenomenon, and it is possible that it is no more than that. A monetary authority may engineer a nominal devaluation designed to raise the domestic currency prices of exports and import-competing goods, and hence to benefit these industries. But if nominal wages quickly rise to compensate for the higher tradable-goods prices, no real effects – no rises in the absolute and relative profitability of tradable-goods industries – will remain. Monetary policy can influence the nominal-exchange rate, and possibly can even maintain it at a fixed value, but it cannot necessarily affect the real exchange rate. The real exchange rate refers to the relative price of tradable and non-tradable goods. While its absolute value is difficult to measure because of the ambiguity of the distinction between tradable and non-tradable goods, changes in it are usually – and reasonably – measured or indicated by relating changes in the nominal exchange rate to changes in some index of domestic prices or costs, or possibly to the average nominal wage level. This is sometimes called an index of competitiveness.

A nominal devaluation will devalue the real exchange rate if there is some rigidity or sluggishness either in the prices of non-tradables or in nominal wages. The nominal devaluation will then raise the prices of tradables relative to wage costs and to labour-intensive non-tradables. Thus it protects tradables. This is “exchange-rate protection”. It protects the whole group of tradables relative to non-tradables. It will tend to shift resources into tradables out of non-tradables and domestic demand in the opposite direction. If at the same time macroeconomic policy ensures a demand-supply balance for non-tradables – hence decreasing aggregate demand (absorption) in real terms appropriately – a balance of payments surplus (or at least a lesser deficit than before) will result. This refers to the balance of payments on current account since the concurrent fiscal and monetary policies can have varying effects on private capital inflow.

If the motive for the real devaluation was to protect tradables, then the current account surplus will be only a by-product, leading to more accumulation of foreign exchange reserves than the country’s monetary authority really wanted. Alternatively, if the motive for the real devaluation was to build up the foreign-exchange reserves – or to stop their decline – then the protection of tradables will be the by-product.

The main point to make is that a real exchange-rate change has effects on the relative and absolute profitability of different industries, a real devaluation favouring tradables relative to non-tradables, and a real appreciation the opposite. A nominal exchange-rate change can thus serve an industrial-policy purpose, provided it can be turned into a real exchange-rate change and that the incidental effects on the balance of payments are accepted.

This does not mean that it is an optimal form of industrial policy. . . . [P]rotection policy could be directed more precisely to the industries to be protected, avoiding the by-product effect of an undesired balance-of-payments surplus; and in any case it can be argued that defensive protection policy is unlikely to be optimal, positive adjustment policy being preferable. Nevertheless, it is not difficult to find examples of countries that have practiced exchange-rate protection, if implicitly. They have intervened in the foreign-exchange market to prevent an appreciation of the exchange rate that might otherwise have taken place – or at least, they have “leaned against the wind.” – not because they really wanted to build up foreign-exchange reserves, but because they wanted to protect their tradable-goods industries – usually mainly their export industries.

Notice that the first part of this quotation repeatedly makes the point that what matters is not the nominal exchange rate, but rather the real exchange rate.  The nominal rate matters only to the extent that it impacts the real rate.  That’s progress, as David had previously cited data on China’s nominal exchange rate (specifically the peg to the dollar) as evidence of currency manipulation. I pointed out that the real value of the Chinese yuan had been appreciating during this period.   In his reply David notes (correctly) that the real appreciation does not prove that China was not manipulating the currency.  I’m happy to accept that response, and leave China as an open question.  Perhaps China did manipulate its currency, but we’d need to go beyond the nominal exchange rate peg.

But I’m still trying to discover a definition of currency manipulation in the Corden quote above.  Is it here?

A nominal devaluation will devalue the real exchange rate if there is some rigidity or sluggishness either in the prices of non-tradables or in nominal wages. The nominal devaluation will then raise the prices of tradables relative to wage costs and to labour-intensive non-tradables. Thus it protects tradables.

I can’t figure out what that means.  Taken literally it seems to imply that a nominal appreciation depreciation that is associated with a real appreciation depreciation is a form of protectionism.  But that’s obviously nonsense.  So what is he claiming?  We know the nominal exchange rate doesn’t matter; only the real rate matters.  But currency manipulation can’t be just a depreciation in the real exchange rate, as real exchange rates move around for all sorts of reasons. If a revolution broke out in Indonesia tomorrow, I don’t doubt that the real value the their currency would plummet.  But no one would accuse Indonesia of currency manipulation.

So we need to look deeper than the nominal exchange rate, and we need to look deeper than the real exchange rate.  How about a decline in the real exchange rate caused by government policy?  Maybe, but I don’t recall anyone accusing the Norwegians of currency manipulation when they set up a sovereign wealth fund for their oil riches.  That’s a government policy that encourages national saving and hence boosts the current account.  Nor was Australia accused of currency manipulation when they did tax reform in the late 1990s.

The term ‘motive’ seems to play a role in the passage above:

If the motive for the real devaluation was to protect tradables, then the current account surplus will be only a by-product, leading to more accumulation of foreign exchange reserves than the country’s monetary authority really wanted. Alternatively, if the motive for the real devaluation was to build up the foreign-exchange reserves – or to stop their decline – then the protection of tradables will be the by-product.

As an economist, references to “motives” make me very uncomfortable.  Let’s take the example of China.  Did China’s government try to reduce the real value of the yuan because they saw what happened during the 1997 SE Asia crisis, and wanted a big war chest in case they faced a balance of payments crisis?  Or did they do the weak yuan policy to shift resources from domestic industries to tradable goods industries?  I have absolutely no idea, nor do I see why it matters.  Surely if a concept of currency manipulation has any coherent meaning, it cannot depend on the motive of the policymakers in a particular country?  We aren’t mind readers.  This is especially true if we are to believe that currency manipulation hurts other countries, as its proponent seem to suggest.  How will it be identified?

In the spirit of Bastiat, consider the following analogy.  Suppose that for years we had been buying bananas from Colombia for 10 cents a pound.  American consumers got to eat lots of cheap tasty fruit, which don’t grow well in non-tropical countries.  Then in 2018, Trump sends a team of investigators down to Colombia, and finds out that we’ve been scammed.  It’s actually not a warm country, indeed quite cool due to its high elevation.  The Colombian government had spent millions building giant greenhouses to grow bananas.  We’ve been tricked into buying all these cheap bananas from Colombia, which artificially created a “competitive advantage” in the banana industry through subsidies.

Here’s my question:  Why does it matter why the Colombian bananas were cheap?  If we benefited from buying the bananas at 10 cents a pound, why would we care if the price reflected true competitive advantage or government subsidy?  Does the US benefit from buying 10-cent bananas, or not?

But that’s not all.  Even if you convinced me that we should worry about interventionist policies in our trading partners, I’d still want a definition of currency manipulation.  There are a billion ways that a foreign government could influence a real exchange rate.  Which ones are “manipulation”? It’s meaningless to talk about China depreciating its currency, without explaining HOW.  A currency is just a price, and reasoning from a currency change (real or nominal) is simply reasoning from a price change.  Which specific actions constitute currency manipulation?  I don’t want motives, I need verifiable actions.  And does this concept have to involve a current account surplus?  Australia’s been running CA deficits for as long as I can remember.  Suppose the Aussie government did enough “currency manipulation” to reduce their trend CA deficit from 4% of GDP to 2% of GDP.  But it was still a deficit.  Would that be “manipulation”.  Why or why not?

Should we care why a country has a big CA surplus? Suppose Switzerland has a big CA surplus due to high private saving rates, Singapore has a big CA surplus due to high public saving in common stocks, and China has a CA surplus due to high public saving in foreign exchange.  What difference does it make?  (And I haven’t even addressed Ricardian equivalence, which further clouds these distinctions.)

We know that the only way that governments can affect the real exchange rate is by enacting policies that impact national saving or national investment.  But almost all policies impact either national saving or national investment.  So which of those count as manipulation?  Is it merely policies that lead to the accumulation of foreign exchange?  If so, then won’t you simply encourage countries to use some other technique for boosting national saving? An alternative policy that avoids having them be labeled currency manipulators?

And why is this called “creating a competitive advantage”.  It doesn’t give an overall economy a competitive advantage, just one sector—exports. Other sectors are put in an equal and opposite disadvantage.  So why not call these currency manipulation policies “competitive disadvantage”.  Or conversely, why not label agricultural subsidies a form of “competitive advantage”.  After all, just as high saving policies boost the export sector, agricultural subsidies boost the agricultural sector.  Or consider America’s low saving fiscal policy, which boosts our service sector.  Do those policies also give America a competitive advantage?  After all, services are far bigger than exports.

When you read people use the term “competitive advantage” it’s hard to avoid the inference that they are claiming that these policies will somehow boost aggregate demand.  Paul Krugman rightly mocked those arguments back in the 1990s, pointing out that monetary policy determines AD.  So then is “currency manipulation” just a special theory that only applies at the zero bound?  It’s hard to tell, the descriptions of this concept are all so vague.

I’d still like a very short and highly precise definition of currency manipulation.  Just a couple sentences.  What data points do I look at to determine if a currency is being manipulated?  If it’s the nominal exchange rate then I disagree with the definition.  If it’s the real exchange rate then I disagree with the definition.  If it’s the current account balance then I disagree with the definition.  If it’s the accumulation of foreign exchange then I disagree with the definition.  A definition involving any of those criteria would be so flawed as to be meaningless.  So what is the definition?

PS.  David also asks the following question:

Scott often cites sticky prices as an important assumption of macroeconomics, so I don’t understand why he thinks that the nominal exchange rate has no effect on trade. If prices do not all instantaneously adjust to a change in the nominal exchange rate, changes in nominal exchange rates are also changes in real exchange rates until prices adjust fully to the new exchange rate.

Talking about the effect of a price on quantities is reasoning from a price change, and hence wrong.  If the currency depreciation is caused by monetary stimulus, then I agree that output is likely to rise in the short run, due to sticky wages.  But that’s equally true in a closed economy.  As far as the trade balance, it depends on the relative size of the income and substitution effects.  The massive dollar devaluation of 1933 had almost no effect on the trade balance, as the income and substitution effects were roughly equal size, but pushed in opposite directions.  So was that currency manipulation?  Did FDR’s motives matter?  I still don’t understand why any of this matters.

PPS.  David’s post also refers to “undervalued currencies”, but this term is just as vague as currency manipulation or competitive advantage.  What makes a currency undervalued?


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28 Responses to “I’m still waiting for a definition of “currency manipulation””

  1. Gravatar of Matthew McOsker Matthew McOsker
    29. August 2017 at 10:31

    In Soviet Russia, currency manipulates you!

    I think the definition is simple where one country consciously manages the value of their domestic country against a foreign country. Seems this is an argument over the interpretation of the particular manipulation, rather than the definition itself. Just like currency values are relative, so is the interpretation. Some interpret manipulation as the foreign entity gaining an advantage, where others may not see it that way. A lot of currency pegs may help a country contain inflation, until it blows up and ends in disaster (and it often does).

    In reality, imports are often a benefit and exports often a cost.

  2. Gravatar of Jerry Brown Jerry Brown
    29. August 2017 at 10:52

    $750? Wow! those California license plates are pretty expensive.

  3. Gravatar of marcus nunes marcus nunes
    29. August 2017 at 11:09

    A funny one on CM
    “Maybe wanting to arrive at a round and easily remembered number like 20, Bergsten commits the ‘sacrilege’ of including ‘poor Denmark’ on the list. Obviously Denmark is not poor, only in the sense that it´s ‘contractually’ tied to the euro and so is ‘forced’ to buy and sell euros in order to keep the DKr/Euro rate constant (within a narrow band).”
    https://thefaintofheart.wordpress.com/2013/05/27/from-57-varieties-of-tomatoes-in-heinz-ketchup-to-exactly-57-communists-in-the-defense-department/

  4. Gravatar of Major.freedom Major.freedom
    29. August 2017 at 11:45

    Summer you are not waiting for a definition of currency manipulation, you are only communicating your disagreement with a particular set of definitions used by whoever out there.

    Definitions are not right or wrong, for they make no declarative statement about the world as it is. Definitions are mere semantic rules for how words are to be juxtaposed.

    You make it seem like the definitions you are referring to are wrong simply because you don’t like them. Well good, you don’t have to use any definition you don’t want to use, but what you cannot do is insist that others change their definition on the virtually groundless basis that you are working from, which ranges from apologizing for central counterfeiters who apparently cannot “manipulate” anything because they are holy and wise, meaning powerful and influential in your preferred jargon, so you defer to their authority, and all other definitions are rejected as threats to central counterfeiter hegemony.

    Central counterfeiters cannot, in your imaginary ideal world, manipulate currency because whatever they do, is “policy” you see. I bet you would prefer it if people labelled what the counterfeiters do as policy rather than manipulation. Why? Not because you have good intentions to seek truth, since you pretend truth cannot be known, but rather to brainwash people into believing that the counterfeiters are not manipulating anything, only conducting a “policy” which of course you subject to your own preferences as good or bad policy. Never manipulating, at best they are only ever “misguided” or some other softball criticism that plagues your monetary posts.

    Here is not definition, but an explanation, that you cannot refute because any attempt to refute it, will utilize and acknowledge the very principles that necessarily lead to that explanation. Of course your socialist background will recoil at this, so in before you dismiss this out of emotion not reason:

    A currency manipulator is a person who uses non-market means to affect the supply of said currency.

    Your underground, “illegal” counterfeiters throughout the country are in the same category as the state sanctioned counterfeiters that you all central banks. Both use non-market means, I.e. political force, I.e. naked aggression, to aggrandize themselves or their friends, at the expense of everyone else whose purchasing power is reduced.

    Just like me bringing in a supply of 10,000 hotdogs to a baseball game for sale to the highest bidder is going to reduce the purchasing power of the existing concession stand owners, EVEN IF THEY KNEW I WAS COMING, so too will bringing in billions and billions of new paper currency units will reduce the purchasing power of everyone holding currency and related denominated assets, even if they knew the inflation was coming. You just cannot raise your prices and keep the same production going before your customers actually come into ownership of the new money. Until they do, those individuals who did come into ownership of said currency before everyone else, will be able to buy more at their expense. And it is indeed at their expense because the reference is a free market where people are not forced to use that currency, and not forced to have the supply increase by arbitrary amounts until “somebody” spends more and provides the requisite additional nominal demand to cover the increased prices.

    Again, I don’t expect the socialist minded economists out there to entertain this explanation, in part because it is a direct threat to their own livelihoods, or, it will be embarrassing to have to admit after all these years that one was merely pushing a political doctrine, to be imposed by force on innocent people, to benefit the few, you know, what you define as “pragmatism”.

    To Sumner, just like Stalin never “manipulated” the food supply, on account of his say so being “policy”, after which the citizenry are only to lob softball criticisms, if that, so too do central counterfeiters today never “manipulate”, everything they do is “policy”.

    ———–

    This is what happens to people who have moved beyond Trump Derangement Syndrome:

    http://i.imgs.fyi/img/1a0w.jpg

  5. Gravatar of John Wentworth John Wentworth
    29. August 2017 at 14:31

    Total amateur here, but I’m going to take a shot at the question anyway.

    It seems reasonable to say that the fed “manipulated” the price of mortgage securities by buying them up. It would be equally correct to say that the fed manipulated the value of the dollar relative to mortgage securities, but that’s less intuitive for laypeople.

    By the same logic, if China buys up lots of dollars or dollar-denominated debt, then they are “manipulating” the value of the dollar, or the value of their currency relative to the dollar. Just as people holding long/short positions in MBS might be unhappy with the fed “manipulating” MBS values, people with long/short positions in the dollar might be unhappy with China “manipulating” the dollar value.

    In short: we could define “manipulation” as a central bank reallocating its portfolio in a manner which is neutral to inflation/interest rates, but changes the relative value of some other asset. This isn’t necessarily how the term “manipulation” is always used in practice, but it seems like at least a sufficient condition.

  6. Gravatar of ssumner ssumner
    29. August 2017 at 17:33

    John, So what if a non-central bank part of a government buys the assets—is that no longer currency manipulation?

  7. Gravatar of Bob Murphy Bob Murphy
    29. August 2017 at 17:35

    Scott,

    On this post, I’m not trolling you. (In contrast, I *am* going to troll you a bit on your super-neutrality post.)

    David is making an obvious point. If a government is intentionally lowering the real exchange value of its currency in order to gain an export advantage, then it is engaging in currency manipulation. A la your point about Bastiat, we don’t need to *care*, but the concept is coherent.

    To push back against that, you write:

    Surely if a concept of currency manipulation has any coherent meaning, it cannot depend on the motive of the policymakers in a particular country? We aren’t mind readers.

    Well, what about this claim?

    “Surely if a concept of tight money has any coherent meaning, it cannot depend on the mental framework of the policymakers. We aren’t mind readers.”

    Do you agree with that? For example, if Fed officials take some actions during the day and we see interest rates go up, surely that’s all we need to know if we’re going to classify it as “tight” or “loose” money, right? Somebody might suggest that it depends what the motivations were–maybe the Fed officials didn’t even care about interest rates, and were just trying to get NGDP growth to be according to their subjective target–but you would say that’s nonsense because we can’t read minds?

    I’m truly not being facetious here, Scott. If you had asked me (before I saw your current post here about Glasner) which monetary economist stressed the importance of evaluating policy in terms of the intentions of the policymakers, I honestly would have said, “Scott Sumner has made me appreciate this more than anybody else.”

  8. Gravatar of Bob Murphy Bob Murphy
    29. August 2017 at 17:38

    David Glasner: In order to classify Dick Cheney as an attempted murderer, we need to know that he intended to shoot his hunting buddy.

    Scott Sumner: What are we, mind readers? I can’t believe the legal concept of “homicide” involves intentions. This is nutty. What if a tree fell over and killed his buddy, would the tree be a murderer now too?

  9. Gravatar of ssumner ssumner
    29. August 2017 at 18:47

    Bobm, Nice try, but you failed again. You are attributing ideas to me that I’ve don’t hold and have never expressed. Since when do I think interest rates are a measure of tight money? Or the unspoken intentions of monetary policymakers? I have at times suggested that money can be viewed as easy if NGDP growth exceeds the publicly announced target, and vice versa. That’s very different from mindreading.

    And what this has to do with currency manipulation is beyond me. Are you suggesting that currency manipulation occurs when the exchange rate moves beyond the publicly announced target of the policymakers? I have no idea what you are trying to do here.

    As for your second comment, it makes your first one seem almost intelligible by comparison.

  10. Gravatar of Patrick Sullivan Patrick Sullivan
    29. August 2017 at 21:24

    ‘For example, if Fed officials take some actions during the day and we see interest rates go up, surely that’s all we need to know if we’re going to classify it as “tight” or “loose” money, right?’

    As I was saying just a day or so ago, until the economics profession grasps that interest rates are NOT the price[s] of money, there’s no hope that journalists or the general public will.

    Bob Murphy, you might want to reread ‘Monetary Policy v. Fiscal Policy.’ The transcript of the famous NYU debate in 1968 between Walter Heller and Milton Friedman. You’ve just made the same freshman error Heller made back then. Look for Friedman’s correction of that error in his rebuttal.

  11. Gravatar of MACO MACO
    30. August 2017 at 10:07

    Hi gang!

    Link to Patrick’s above mentioned NYU debate

    Enjoy

    https://fraser.stlouisfed.org/files/docs/meltzer/monetary_fiscal_friedman_1969.pdf

  12. Gravatar of Michael Rulle Michael Rulle
    30. August 2017 at 10:38

    Again, it is almost impossible to know what you are talking about because you seem to have some hidden meaning in your mind as to what manipulation means. Manipulation sounds like a “bad” thing. “Impacting the value of a currency” seems more like a value neutral way of saying the same thing.

    My definition of manipulation (in the value neutral sense) is “any policy conducted by a central bank”.

  13. Gravatar of Philo Philo
    30. August 2017 at 13:38

    As a native speaker of English, I think the term ‘manipulation’ must refer to intentions. As a result, ‘currency manipulation’ must stand for a concept that is useless for international or policy-setting purposes. In part, this is because the intention in question must be that of a collective entity–a government. But the various members of the government whose cooperative effort puts the country’s economic policies into effect doubtless have somewhat different purposes behind their activities, and there is no clear way to combine these diverse individual intentions into a “collective intention.” We are not mind-readers about governmental intentions because governments literally have no minds.

    If we object to a foreign government’s policy, it should be because of its effects, not its supposed intentions. In the present case, it seems that the relevant effect that is being considered objectionable is supporting or enhancing the foreign country’s export industry or industries, as compared with some alternative policy that would be neutral as between export and non-export industries. Whether or not this effect is achieved by means that include something about the value of the currency should then be irrelevant. But 1) this concept of “neutrality” needs to be spelled out; and, even if we could do this, 2) surely it would be outrageous interference in the domestic politics of a foreign country to demand that it follow such a “neutral” policy.

  14. Gravatar of Philo Philo
    30. August 2017 at 13:40

    “. . . international DIPLOMATIC or policy-setting purposes.”

  15. Gravatar of John Wentworth John Wentworth
    30. August 2017 at 14:27

    Scott,

    If some component of the government other than the central bank is buying (or selling/shorting) assets, that would still be manipulation. For example, if any part of the US government suddenly announced that it was buying up large amounts of copper futures, I don’t think anyone would hesitate to call that manipulation of copper prices. The difference is that nobody would be tempted to think of that as USG playing with the value of the dollar, though they would be changing the value of a dollar relative to copper.

  16. Gravatar of Bob Murphy Bob Murphy
    30. August 2017 at 17:16

    Patrick Sullivan wrote:

    Bob Murphy, you might want to reread ‘Monetary Policy v. Fiscal Policy.’ The transcript of the famous NYU debate in 1968 between Walter Heller and Milton Friedman. You’ve just made the same freshman error Heller made back then. Look for Friedman’s correction of that error in his rebuttal.

    Patrick Sullivan, you might want to re-read my comment. Of COURSE as a long-time reader of this blog, I know that Scott doesn’t think raising interest rates is the correct way to gauge the stance of monetary policy.

    I was trying to show that Scott’s preferred approach to monetary policy relies on the intentions (or “the long-term regime” more specifically) of the policymakers.

    So when he’s saying that “currency manipulation” is an incoherent concept if it relies on knowing the intentions of the government officials, I think he just blew up his whole framework.

  17. Gravatar of Bob Murphy Bob Murphy
    30. August 2017 at 17:18

    Scott Sumner wrote:

    “I have at times suggested that money can be viewed as easy if NGDP growth exceeds the publicly announced target, and vice versa. That’s very different from mindreading.”

    OK Scott, so suppose the central bank announces publicly: “We are taking steps XYZ to reduce the real value of our currency, in order to boost exports and reduce the current account deficit.”

    Does that count as currency manipulation? No mind-reading necessary.

  18. Gravatar of If Nobody Gets My Analogies, Whose Fault Is It? If Nobody Gets My Analogies, Whose Fault Is It?
    30. August 2017 at 17:26

    […] Scott recently criticized David Glasner’s definition of “currency manipulation” because it relied on the intentions of the […]

  19. Gravatar of Bob Murphy Bob Murphy
    30. August 2017 at 17:34

    Patrick Sullivan:

    Just to be clear(er): I realize it may have looked like I was simply stating what I thought were true statements about the evaluation of monetary policy.

    But really, I was saying: “Scott, if we buy your arguments about ‘currency manipulation,’ then it implies we would also have to say this about monetary policy…” and then I typed out something we all know Scott would hate.

    So, I’m saying Scott’s objections against Glasner don’t work, unless Scott is willing to throw out his own framework for evaluating monetary policy.

  20. Gravatar of David R. Henderson David R. Henderson
    30. August 2017 at 19:56

    Scott,
    You write:
    “Surely if a concept of currency manipulation has any coherent meaning, it cannot depend on the motive of the policymakers in a particular country? We aren’t mind readers.”
    If your point is that it’s *hard* to read minds and that we often will make mistakes in trying to do so, then I agree with you. But aren’t there situations where you can read minds? Imagine that Congress passes a law, and the president signs it, saying that the Fed must target NGDP. Wouldn’t it be fair to say that a large % of the Congressmen who voted for that bill had, as their motive, having the Fed target NGDP?

  21. Gravatar of ssumner ssumner
    31. August 2017 at 08:05

    John, But which market is being manipulated if the government buys lots of copper? It’s the copper market. The currency manipulation crowd seems to believe the purchase of copper manipulates the trade balance.

    Bob, You asked:

    “Does that count as currency manipulation? No mind-reading necessary.”

    Yes, I presume it does. (Although I still want a definition–“xyz” is kind of vague.) So there is no contradiction with my views on monetary policy.

    I’d be thrilled if the currency manipulation crowd adopted that as the official definition, as it almost never happens in the real world.

    David, Yes, but I am referring to accusations of currency manipulation where the accused does not admit to intending to manipulate the currency. (Which seems to be just about all of the real world examples.)

    So here’s the question: If a country doesn’t admit to manipulation, which data points do we look at to establish whether it occurred?

  22. Gravatar of David R. Henderson David R. Henderson
    31. August 2017 at 09:08

    @Scott,
    “David, Yes, but I am referring to accusations of currency manipulation where the accused does not admit to intending to manipulate the currency. (Which seems to be just about all of the real world examples.)”
    Ah, good. I was worried that you were making a more general claim.

  23. Gravatar of Gene Callahan Gene Callahan
    31. August 2017 at 09:45

    “We aren’t mind readers” is absurd: as highly social creatures, we are mind readers par excellence. One of the very first things we learn to do is read our parents’ minds!

  24. Gravatar of John Wentworth John Wentworth
    31. August 2017 at 11:27

    Scott,
    You’re preaching to the choir on that point. I think there is a coherent and useful concept of manipulation, which people could reasonably be unhappy about, but most of the people who talk about currency manipulation are talking nonsense.

    That said, we should aim for a higher standard of rigor than just refuting what people *say*. People have some intuition that China is “manipulating” its currency in a way harmful to the US; just because people are terrible at explaining their own intuition does not make the intuition wrong. If we just refute what people say, then those people will still feel like their intuition is right, and will go looking for some other way to explain it. The real gold standard is to explain why people have this intuition in the first place.

    I think (part of) the reason people don’t understand their own intuition here is that, if China “manipulates” currency values by shifting their portfolio heavily into dollars, it’s not really the value of their own currency that’s being manipulated – it’s the value of the dollar. (Just like if the US buys up copper, it’s the copper market that’s being manipulated.) But that’s not how people are used to talking about central banks, so the explanations haven’t caught up to the intuitions yet.

  25. Gravatar of FSE FSE
    31. August 2017 at 23:09

    A simple test for intentionality: is it reasonable to characterize an outcome as “failure”?

    Usually, exchange rates fluctuate but do not “fail”. But what about policies? Does it make sense to consider the possibility that a policy “fails” to achieve a certain exchange rate? If so, that policy is an example of currency manipulation.

  26. Gravatar of FSE FSE
    31. August 2017 at 23:22

    I should also point out that intentionality *matters*.

    Simple example: you are lying in bed in a hotel room at night. Outside, you hear a sudden noise. You rush to the window, and see that something has accidentally fallen to the ground. Unintentional. You go back to bed. Now suppose you ran to the window and saw the noise came from a drum kit. The drummer appears to be warming up. The sound was intentional. It’s going to be a difficult night, and you may need to intervene.

    Likewise, if an unwanted shift in exchange rates is incidental or accidental, it may not warrant a response. If it’s intentional, i.e. “currency manipulation”, then a policymaker should expect it to happen again. Thus, it is more likely to warrant some sort of response.

  27. Gravatar of ssumner ssumner
    2. September 2017 at 09:50

    John, You said:

    “That said, we should aim for a higher standard of rigor than just refuting what people *say*. People have some intuition that China is “manipulating” its currency in a way harmful to the US; just because people are terrible at explaining their own intuition does not make the intuition wrong.”

    But in this case their intuition is wrong. I wrote this post to try to elicit an intelligent definition of currency manipulation. I’m still waiting.

    FSE, You said:

    “Does it make sense to consider the possibility that a policy “fails” to achieve a certain exchange rate?”

    Real or nominal exchange rate? That makes all the difference in the world.

  28. Gravatar of Swimmy Swimmy
    12. September 2017 at 07:04

    Here’s a shot:
    ‘If a country is seen as the ingroup, no government action that affects exchange rates is currency manipulation. If a country is seen as the outgroup, any government action that affects exchange rates can be called currency manipulation.’

    This isn’t a useful definition for economists, but I think it’s the definition used in popular discourse. It explains why nobody cares what Australia and Switzerland do. And why China gets called currency manipulators no matter which direction they take their currency.

    There is an official governmental definition of what counts as currency manipulation, passed by the Obama administration. It does not match how the term is used in popular discourse. It’s also not very useful for policy. But it’s there, enshrined into law.

    From a CNBC article:
    ‘…A trade surplus of larger than $20 billion, or 0.1 percent of U.S. GDP; a trade surplus with the U.S. that is more than 3 percent of that country’s GDP; … purchases of foreign currency amounting to more than 2 percent of the country’s GDP in a one-year period.

    No country meets all three criteria…’

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