On “currency wars”

We keep hearing concerns about “currency wars” around the wold, with the blame being put on Quantitative Easing.  In fact our Reserve Bank even came out to complain about QE.

But to be honest, this argument is nonsensical unless you are explicitly forecasting “monetary policy failure” overseas.

Lets go back to Essays on the Great Depression by Ben Bernanke – when talking about countries depreciating by rolling off the gold standard:

Depreciation, in this context, should not necessarily be thought of as a “beggar thy neighbor” policy; because depreciations reduced constraints on the growth of world money supplies, they may have conferred benefits abroad as well as at home.

With interest rates stuck at the zero lower bound, and a sharp contraction in lending across the world, the fact that QE lead to devaluation in the US currency should not be seen as a bad thing.

QE is, in essence, aiming to lower interest rates within the US economy in order to bring forward spending and investment – to stimulate “aggregate demand”.  Why did we not get similar arguments from people whenever the US cut interest rates prior to the crisis … as it is essentially the same thing.

Instead of getting annoyed at the high currency, lets ask what it is telling us about monetary and economic conditions here – instead of assuming that the value of the dollar is “wrong”, and asking for arbitrary organisations to “do something” lets use it like any other price, and try to understand what it is telling us.

6 replies
    • Matt Nolan
      Matt Nolan says:

      Haha, good question.

      Like all prices they can be the result of multiple things. If overseas monetary policy is simply consistent with their inflation mandate, then a lift in the NZ dollar is required to prevent monetary conditions in NZ from easing right (as foreign lenders would undercut current lenders to meet investment demand).

      So a higher dollar in this context represents the fact that NZ is expected to perform a lot more strongly than overseas countries. It is either that, or we may believe that monetary conditions in NZ are too tight.

      It is only excessive “currency intervention” when it involves explicit capital controls, or a willingness to run inflation past the target – in a way that is inconsistent with dealing with the ZLB.

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  1. […] all involved in Quantitative Easing – which is a form of monetary policy.  We discussed this issue here and here.  QE is not “beggar thy neighbour”, it is an easing of monetary policy […]

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