Question

Fred Bergsten and Joseph Gagnon, in their book, have set the parameters to understand and identify currency conflicts and impacts on trade.

Please explain and define currency conflict

What are the main effects/problems with a currency conflict?

How or when can country be identified as a “currency manipulator”? That is, what constitutes manipulation? Make sure you explain at least 2 of the characteristics that labels a country as being a “manipulator”.

Countries that manipulate currencies are divided in three groups by the authors. Please explain these groups and why each country can be categorized in each group.

According to the authors, what are the options available to respond to manipulation?

Please list them all, then pick and explain just one

Answer 1

Please explain and define currency conflict

Currency conflicts can also be termed as currency war which is a situation in international economy where different countries decline their exchange rate in relation to other currencies in order to make a trade gain.

What are the main effects/problems with a currency conflict?

Currency conflicts occurs due to several reasons such as to stimulate economic growth, in order to promote and support export of the country by making the product cheaper in other countries which will automatically induce more export of the particular product and to fight with deflation.

How or when can country be identified as a “currency manipulator”? That is, what constitutes manipulation? Make sure you explain at least 2 of the characteristics that label a country as being a “manipulator”.

As per the standards and regulation of world trade organization (WTO) and International monetary foundation (IMF), no nation is allowed to use currency manipulator in order to make trade advantages. Three standards have been fixed by international monetary foundation (IMF) to recognize currency manipulators in any trade agreements which are:

1. If a country has account surplus (exports are greater than imports) in the set of six months interval.
2. If country add to its foreign exchange reserve in the set of six month interval.
3. If a country’s foreign exchange reserve is more than adequate in three month interval of imports.

Countries that manipulate currencies are divided in three groups by the authors. Please explain these groups and why each country can be categorized in each group.

As per the author, currency manipulators are divided into three main groups which are Oil exporters, advanced economies of Europe and East Asian nations.

The oil exporters group of currency manipulators include most of the Arab nations (UAE), Kuwait, Algeria, Russia, Norway, Qatar and Saudi Arabia. This group has the largest share of holding financial assets.

The second group is advanced economies in and around Europe. They hold lesser reserves in comparison of other two groups. Switzerland, Denmark and Israel are the main countries included in this group.

The third group is the largest share holder of foreign currency reserves which mainly includes Japan and countries like Korea, Thailand, Hong Kong, Singapore, Malaysia and Taiwan. All these countries share are approximately equal to China’s.

According to the authors, what are the options available to respond to manipulation? Please list them all, then pick and explain just one

According to author, there are two main options to respond to the currency manipulation and they are constraint on taxation or restriction on intervention proceeds and countervailing currency intrusion. Countervailing currency intervention (CCI) controls currency manipulation and do not let any country to influence the currency rate in the economy.