Paper
War of Currencies Recent Trends
- Authors:
- Christian Pierdzioch; Georg Stadtmann; Leila Tselauri
- Abstract
- Currently, the term currency war is on the agenda of many international organizations and governments. Several factors that affected the international competitiveness of nations as well as their wealth position fueled this discussion. We use the Big Mac index as a proxy for the international competitiveness. The comparison between the U.S. and China reveals a strong undervaluation of the Chinese currency against the USD. Nevertheless, the recent loosing of American monetary policy might also cause negative effects for China: Due to the fact that the exchange rate is unilaterally fixed, changes of the nominal exchange rate will not play a major role. Instead, we focus on the implications of a higher American inflation rate on the wealth position of China as well as the impact of the American inflation rate on the Chinese counterpart (imported inflation). In a second step we highlight the implications of the artificially low exchange rate of China for the competitiveness of third parties such as for example Brazil. Due to low interest policy of the U.S., some emerging countries suffer from a deterioration of their competitiveness due to an appreciation of their currencies. Under consideration of this background it is understandable why a Brazilian politician started the discussion about a war of currencies and why capital controls were implemented. The article closes with a short analysis of the most recent developments such as the fixing of the Swiss currency against the Euro.
- Keywords
- Depreciation, Competitiveness, Central Bank Intervention, Foreign Exchange Reserves, Big Mac Index
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