Friday, June 20, 2008

Copy with care

Quite often, one hears the idea that India should emulate Chinese-style exchange rate policy, on the grounds that this will help India move up from 7.5% trend GDP growth to Chinese-style 11% GDP growth. I wrote an article Copy with care in Financial Express yesterday, where I talk about the role of exchange rate policy in the Chinese growth miracle, about the costs of Chinese exchange rate policy and the long-term sustainability of Chinese exchange rate policy.

On the difficulties of Chinese monetary policy, read: Barry Eichengreen and Martin Wolf.

3 comments:

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  2. Don't we already have defacto devaluation policy?

    Also what about the historic argument that by a fixed exchange rate to USD, a country borrows the stability offered by US Fed. It's probably not a positive/issue anymore.

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  3. I thought this may be of interest - Robert Mundell on exchange rates from today's Europe's WSJ, while reiterating a call for a common Asian currency and eventually a global currency:

    "If Mr. Mundell had his way, there wouldn't be anything for politicians to say about exchange rates. They would be fixed – as they were under the Bretton Woods arrangement after World War II until 1971, when President Nixon took the U.S. off the postwar gold standard and effectively launched the era of floating exchange rates.

    "It's a very poor and a dangerous system," Mr. Mundell says of the floating regime, "because it creates exaggerated swings in the exchange rate." Case in point is the dollar-euro rate. From a low of about 82 cents in 2000, Europe's common currency has risen fairly steadily and has been valued at more than $1.50 since late February, even breaking the $1.60 barrier once.

    "What people have to realize is there's been a fundamental change in the way markets work in the past 20 years," Mr. Mundell says. "Now, exchange rates are driven not so much by trade but by capital accounts and capital movements, and the huge amount of liquidity that's sloshing around the world."

    Central banks world-wide, he notes, are trying to reach an equilibrium between dollars and euros in their $6.5 trillion worth of foreign reserves. Roughly two-thirds of these reserves are kept in dollars now, so they have about $1 trillion left to move into euros."

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