Mitchell’s Musings 5-1-2017: Currency Manipulation 101 Daniel J.B. Mitchell Candidate Trump famously promised that - when elected president - he would declare China to be a currency manipulator. More recently, after meeting with president of China Xi Jinping (and apparently asking for his help on the North Korea problem), he declared that China no longer manipulates its currency. Some observers see this shift as a confirmation that the president tends to believe the last person who talks with him. Others see it as a sign of presidential learning that the world is more complicated than he had thought and that seemingly-unrelated problems (such as currency policy and North Korea) are in fact linked. There is another issue beyond the varied analyses of presidential behavior. It’s not clear what “currency manipulation” is supposed to be. In principle, it could mean that if a country’s official monetary institution (Central Bank, Treasury) buys and sells its currency in the foreign exchange market to affect its market price, that country is manipulating its currency. Actually, many countries take some actions in foreign exchange markets to influence their exchange rates. For example, any country which has a fixed exchange rate with another country can only do so by offering to buy and sell its currency at the desired exchange rate in unlimited amounts. (The alternative is to abandon your domestic currency – as all the euro-zone countries have done – and use some other currency.) But there are many lesser forms of targeting or influencing the exchange rate.
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