{
  "title": "Taming the Currency Hype",
  "publication": "IMF Blog, August 21, 2019",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2019/08/21/blog-taming-the-currency-hype",
  "canonical": "https://www.imf.org/en/blogs/articles/2019/08/21/blog-taming-the-currency-hype",
  "overlayPath": "/en/blogs/articles/2019/08/21/blog-taming-the-currency-hype/index.md",
  "summary": "Authors: Gustavo Adler, Luis Cubeddu, Gita Gopinath",
  "sections": [
    {
      "heading": "Context and summary",
      "content": "- Authors: Gustavo Adler, Luis Cubeddu, Gita Gopinath\n- Date: August 21, 2019\n- Main point: Escalating trade tensions and policy responses have weighed on global growth forecasts for 2019-20; exchange rate movements and monetary easing cannot be relied on to correct large trade imbalances, and tariff- or currency-targeting measures are likely counterproductive. Durable solutions require macroeconomic and structural policies by both deficit and surplus countries and cooperation to address trade disputes."
    },
    {
      "heading": "Exchange rates can’t do it all",
      "content": "- Monetary easing stimulates domestic demand and can boost demand for other countries’ goods, but also weakens the exchange rate, producing expenditure switching.\n- Key empirical findings (from the 2019 External Sector Report):\n  - Expenditure switching effects are generally small, especially within a 12-month period.\n  - A 10 percent depreciation (vis-à-vis all currencies) improves a country’s trade balance by about 0.3 percent of GDP in the near term, on average, with most effects coming through a contraction of imports.\n  - Over a span of three years, a 10 percent depreciation leads, on average, to a 1.2 percent of GDP improvement in the trade balance.\n- Reasons for muted effects:\n  - Trade is largely invoiced in dollars, so export volumes tend to respond little to exchange rates in the short run.\n  - For the United States, the muted impact reflects a weak response of imports.\n- Conclusion: Exchange rates facilitate durable external adjustment but the expenditure switching effect of currency weakening and its negative impact on trading partners should not be overplayed."
    },
    {
      "heading": "Counterproductive policy options",
      "content": "- Tariffs:\n  - Tariffs and exchange rates work differently; a 10 percent tariff does not necessarily offset a 10 percent more appreciated exchange rate.\n  - Example: Since early 2018, the average US tariff on goods imported from China increased by about 10 percentage points and would increase by another 5 percentage points if recently announced plans are carried out.\n  - Meanwhile, the renminbi has depreciated by about 10 percent relative to the dollar, largely as a result of these trade actions and associated uncertainties.\n  - In practice, US importers and consumers are bearing the burden of tariffs because dollar invoicing has minimized the impact of the stronger dollar on the dollar prices Chinese exporters receive.\n  - Higher bilateral tariffs are unlikely to reduce aggregate trade imbalances because they mainly divert trade to other countries.\n  - Negative consequences: harm to domestic and global growth by sapping business confidence and investment, disrupting global supply chains, and raising costs for producers and consumers.\n- Direct attempts to weaken the currency:\n  - Proposals to buy foreign currencies or tax inflows to offset other countries’ policies are cumbersome and likely ineffective given the depth of reserve currency markets (dollar, euro).\n  - Such measures have negative implications for the orderly working of the international monetary system.\n- Risks of retaliation:\n  - Policies of either kind will likely encourage retaliation, undoing any benefit for a single country and making all nations worse off.\n  - Such actions may also possibly violate international obligations such as those to the World Trade Organization."
    },
    {
      "heading": "Constructive, shared solutions",
      "content": "- Broad assessment:\n  - External positions are not grossly misaligned; external imbalances are down sharply from the peaks seen during the global financial crisis.\n  - The dollar was only moderately overvalued in 2018, contrasting with the mid-1980s situation that prompted the Plaza Accord.\n- Policy recommendations:\n  - Both deficit and surplus countries should tackle underlying macroeconomic and structural sources of imbalances rather than adopt ineffective or counterproductive measures such as tariffs.\n  - For deficit countries (examples: the United States and the United Kingdom):\n    - Reduce budget deficits without sacrificing growth.\n    - Strengthen competitiveness of export industries, including investing more in skills of workers and encouraging old-age saving.\n  - For surplus countries (examples: Germany and Korea):\n    - Use fiscal policy where possible to invest more in infrastructure.\n    - Adopt reforms that encourage private investment, such as supporting innovation through tax incentives for research and development and lowering barriers to entry in business services and regulated professions.\n  - For China (external position broadly in line with fundamentals in 2018):\n    - Further structural reforms to ensure lasting external rebalancing and to address vulnerabilities from high levels of private and public debt (see the 2019 Article IV consultation for China).\n    - Steps include reforming state-owned enterprises, enhancing the social safety net, opening up more sectors to private and foreign competition, and removing impediments to trade.\n- Multilateral responsibilities:\n  - Surplus and deficit countries share responsibility for a stronger, more balanced global economy.\n  - Durable solutions should include addressing concerns about export subsidies and weak intellectual property protection and modernizing the international trade system in areas such as services and e-commerce.\n  - Currencies are neither the hammer nor the nail when confronting problems like rising inequality and sluggish growth.\n\n---\n\n\n References\n\n- Português\n- forecasts\n- 2019 External Sector Report\n- https://www.imf.org/wp-content/uploads/2019/08/eng-aug-19-currency4.png\n- https://www.imf.org/wp-content/uploads/2019/08/Chart-1-Currency-Blog.jpg\n- earlier blog\n- https://www.imf.org/wp-content/uploads/2019/08/eng-august-15-currency2-2.png\n- https://www.imf.org/wp-content/uploads/2019/08/eng-august-15-currency3-2.png\n- 2019 Article IV consultation for China\n\nSource: https://www.imf.org/en/blogs/articles/2019/08/21/blog-taming-the-currency-hype"
    }
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    "[Markdown version](/en/blogs/articles/2019/08/21/blog-taming-the-currency-hype/index.md)",
    "[Structured JSON version](/en/blogs/articles/2019/08/21/blog-taming-the-currency-hype/index.json)",
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    "Authors: Gustavo Adler, Luis Cubeddu, Gita Gopinath",
    "Published: August 21, 2019",
    "Authors: Gustavo Adler, Luis Cubeddu, Gita Gopinath",
    "Date: August 21, 2019",
    "Main point: Escalating trade tensions and policy responses have weighed on global growth forecasts for 2019-20; exchange rate movements and monetary easing cannot be relied on to correct large trade imbalances, and tariff- or currency-targeting measures are likely counterproductive. Durable solutions require macroeconomic and structural policies by both deficit and surplus countries and cooperation to address trade disputes.",
    "Monetary easing stimulates domestic demand and can boost demand for other countries’ goods, but also weakens the exchange rate, producing expenditure switching.",
    "Key empirical findings (from the 2019 External Sector Report):",
    "Reasons for muted effects:",
    "Conclusion: Exchange rates facilitate durable external adjustment but the expenditure switching effect of currency weakening and its negative impact on trading partners should not be overplayed.",
    "Tariffs:",
    "Direct attempts to weaken the currency:",
    "Risks of retaliation:",
    "Broad assessment:",
    "Policy recommendations:",
    "Multilateral responsibilities:",
    "[Português](https://www.imf.org/pt/News/Articles/2019/08/22/blog-taming-the-currency-hype?sc_mode=1)",
    "[forecasts](https://www.imf.org/en/Publications/WEO/Issues/2019/07/18/WEOupdateJuly2019)",
    "[2019 External Sector Report](https://www.imf.org/en/Publications/ESR/Issues/2019/07/03/2019-external-sector-report)",
    "[https://www.imf.org/wp-content/uploads/2019/08/eng-aug-19-currency4.png](https://www.imf.org/wp-content/uploads/2019/08/eng-aug-19-currency4.png)",
    "[https://www.imf.org/wp-content/uploads/2019/08/Chart-1-Currency-Blog.jpg](https://www.imf.org/wp-content/uploads/2019/08/Chart-1-Currency-Blog.jpg)",
    "[earlier blog](https://blogs.imf.org/2019/05/23/the-impact-of-us-china-trade-tensions/)",
    "[https://www.imf.org/wp-content/uploads/2019/08/eng-august-15-currency2-2.png](https://www.imf.org/wp-content/uploads/2019/08/eng-august-15-currency2-2.png)",
    "[https://www.imf.org/wp-content/uploads/2019/08/eng-august-15-currency3-2.png](https://www.imf.org/wp-content/uploads/2019/08/eng-august-15-currency3-2.png)",
    "[2019 Article IV consultation for China](https://www.imf.org/en/Publications/CR/Issues/2019/08/08/Peoples-Republic-of-China-2019-Article-IV-Consultation-Press-Release-Staff-Report-Staff-48576)"
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