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After a Decade of Denial, Central Banks Admit Currency Wars Are Real

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When I wrote my first book, Currency Wars, in 2011, I was met with a wave of rejection and ridicule from central bankers. They uniformly denied that monetary policy was used to manipulate exchange rates. They insisted that monetary policy was exclusively used to achieve domestic policy goals related to price stability and unemployment.

The idea that one country would deliberately cheapen its currency to promote exports or allow other countries to do the same to help world growth was rejected out of hand. This was all despite the fact that the accusation of currency wars was first proclaimed in 2010 by Guido Mantega, who was then the finance minister of Brazil.

Of course, there was ample evidence to prove that central banks were manipulating foreign exchange rates exactly as I described, although central bankers insisted that this was not “beggar thy neighbor” as in the 1930s but rather “enhance thy neighbor” (in the words of Ben Bernanke in a speech on March 25, 2013).

Whatever the rationale, currency war-style manipulation of exchange rates was and is a primary goal of monetary policy. At last, a major central bank has admitted the obvious. As revealed in this article, economists now take the view that low and negative interest rates can have a stimulative effect on an economy even when there are already ample liquidity and no impediment to borrowing.

This happens through the exchange rate mechanism where low rates produce a cheap currency, which in turn stimulates exports and creates export-related jobs. This is especially true in a country like Japan, which relies on exports of electronics, robots and other high-tech goods to keeps its economy humming.

This is one reason why currency wars last so long in a world burdened by excessive debt and insufficient growth. Finally, economists and central banks are coming clean about a dynamic I first described a decade ago.

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