the Canadians ... announced an amazingly sane response to rapid currency devaluation by... wait for it... the United States. Here's BNA (subscription) with the embarrassing details:
The government will not intervene in the Canadian dollar's continued increase in value compared to the United States dollar, but will instead focus on making businesses more competitive so they can better adjust to a stronger currency, Prime Minister Stephen Harper said April 7.
Scott and I then had a little back and forth in the comments to his post, partly about the difference between the meaning of "devaluation" and "depreciation". One point Scott made was the following:
I see very little difference between what China does/did (i.e., hoarding USD to maintain the RMB's relative value) and what the US is doing (flooding the mkt with dollars at almost 0% interest and constantly signaling a desire for a weaker Dollar). Both nations are "manipulating" the value of their respective currencies for domestic policy reasons. The Chinese action might be a little more blatant, but both strategies involve "unnatural" (i.e., non-market) distortions of currency markets to further domestic policy agendas.
Over at vox, Avinash Persaud makes a similar point:
China held to the same exchange rate peg to the dollar for ten years up to 2005. Under a fixed exchange rate, a country only develops increasing trade surpluses as a result of improving price competitiveness. Of course, for your average American voter familiar with floating currencies, the whole idea of a fixed exchange rate smells of manipulation, but in fact it is easier to "manipulate" a floating exchange rate than a fixed one.
The US will deliberately pursue a policy of a loose monetary policy, partly in order for the dollar to weaken and US exports to grow at the expense of others. Many Europeans would like their central banks to follow a similar path.
This US policy was precisely the kind of beggar-thy-neighbour currency manipulation the IMF was set up to avoid. Instead the IMF is questioning whether a pegged exchange rate is manipulative. Welcome to doublespeak.
And here's Joe Stiglitz:
all governments take actions that directly or indirectly affect the exchange rate. Reckless budget deficits can lead to a weak currency; so can low interest rates. Until the recent crisis in Greece, the US benefited from a weak dollar/euro exchange rate. Should Europeans have accused the US of "manipulating" the exchange rate to expand exports at its expense?
Is the U.S. "manipulating" its currency? How do the various U.S. actions compare to China's actions? What standards would you use to answer these questions? Unfortunately, I'm not sure there are any good standards to apply. This is a big part of why I think international rules on exchange rate policies would be useful. Exchange rates (whether fixed or floating) can be manipulated in order to favor domestic industries. What we need are some objective criteria that can be used to evaluate whether this is happening. Such standards might help avoid some of the heated rhetoric that we have seen over the past few months.
As to the specific substance of the rules, well, that's beyond me. I don't know how you figure out whether "loose monetary policy" has been adopted "in order for the dollar to weaken and US exports to grow at the expense of others." But I would think that if you got together the relevant economic policy-makers in this area, it's possible they could come up with at least some general guidelines for when actions related to exchange rates (both fixed and floating) cross the line, going too far towards the intent of favoring domestic industries through an undervalued exchange rate.
