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1 (April 22, 2015)

handle is hein.crs/crsuntaaigb0001 and id is 1 raw text is: De e Congressional Research Service ~h ifrring the egslative debate stnce 1914, Debates over Currency Manipulation~ April 22, 2015 Overview Some Members of Congress and policy experts argue that U.S. companies and jobs have been adversely affected by the exchange rate policies adopted by China, Japan, and a number of other countries. They allege that these countries use policies to manipulate the value of their currency in order to gain an unfair trade advantage against other countries, including the United States. Other analysts are more skeptical about currency manipulation being a significant problem. They raise questions about whether government policies have long- term effects on exchange rates; whether it is possible to differentiate between manipulation and legitimate central bank activities; and the net effect of currency manipulation on the U.S. economy. Background What is currency manipulation? At the heart of current debates is whether or not other countries are using policies to intentionally weaken the value of their currency, or sustain a weak currency, to gain a trade advantage. A weak currency makes exports less expensive to foreigners, which can spur exports and job creation in the export sector. Can governments weaken their currencies? Economists disagree about whether government policies have long-term effects on exchange rates, particularly for countries with floating exchange rates. However, some economists believe that, at least in the short run, some government policies can impact the value of currencies. One policy is buying and selling domestic and foreign currencies (intervening) in foreign exchange markets. Another is monetary policy, the process by which the central bank controls the supply of money in an economy. It is important to note that although these policies can affect exchange rates, they may be implemented for other reasons, such as increasing foreign exchange reserves or combatting a domestic recession. What is the impact on the United States? If another country weakens its currency relative to the dollar, U.S. exports to the country may be more expensive and U.S. imports from the country may be less expensive. As a result, U.S. exports to the country may be negatively affected, and U.S. producers of import-sensitive goods may find it hard to compete with imports from the country. On the other hand, U.S. consumers who buy imports and U.S. businesses that rely on inputs from overseas may benefit, because goods from the country may be less expensive. Which countries are accused of currency manipulation? There is debate over which countries, if any, are manipulating their exchange rates. Part of the debate is which, if any, government policies should count as currency manipulation. Economists have also developed a number of models to estimate whether the actual value of a currency differs from what it should be according to economic fundamentals. Various models produce different results. A 2012 study by the Peterson Institute of International Economics identifies countries that have engaged in large interventions in foreign exchange markets over a long period of time as currency manipulators. These countries include China, Denmark, Hong Kong, Malaysia, South Korea, Singapore, Switzerland, and Taiwan. Some analysts have also recently accused Japan of currency manipulation. In the first half of 2013, Japan's central bank launched a new set of expansionary monetary policies, similar to the Fed's quantitative easing programs. Japan's policies contributed to a decline in the value of the yen relative to the U.S. dollar. Japanese officials deny any manipulation of the yen. Figure I. Yen per Dollar Japanese yen per U.S. dollar 70 90 100 110 120 130 Note:A decrease means depreciaton of the yen relatfve to the dollar Source: Feder Reseve. Existing Policy Frameworks What frameworks are in place to address currency manipulation? Multilaterally, members of the International Monetary Fund (IMF) have committed to refraining from manipulating their exchange rates to gain an unfair trade advantage. Violators could face loss of IMF funding, suspension of voting rights or, ultimately, expulsion from the IMF. The IMF has never publicly labeled a country as a currency manipulator. Some argue that commitments made in the context of the World Trade Organization (WTO) are relevant to disagreements over exchange rates, although this view is debated. Exchange rates have also been discussed by the G-7 and the G-20. www.crs.gov 1 7-5700

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