Monetary mechanisms for managing competitiveness of national economy: currency wars

Authors:
V.S. Svirskyi1, O.Y. Melykh1
1. Ternopil National Economic University (Ternopil, Ukraine)
Pages:
324 - 333
Language:
Ukrainian
Cite as:


Annotation

The aim of the article is to study theoretical and methodological foundations of the definition «currency wars», to define its methods, causes and consequences of currency confrontations as monetary mechanism of international competitiveness management of national economies.

The results of the analysis. The article examines the nature, causes and consequences of currency wars. It relates recent policy discussions to the empirical lessons. The definition «currency war» appeared relatively recently. It gained popularity not only among politicians and journalists, but also among economists. The term was invented by Brazilian finance Minister Guido Mantega in 2010 in response to quantitative easing in the United States. It is grounded that currency war is not foreign speculative attack on the currency, but conscious deliberate manipulation of the currency market, conducted by the central bank or the government to obtain competitive advantages in foreign trade using currency devaluation. The cross-border effects of currency wars on emerging economies, through goods markets, foreign exchange markets, and financial markets are reviewed. By leading to real exchange rate depreciation, currency wars stimulate net exports, further increasing the foreign demand for domestic goods and services.

The evolution of competitive devaluations as a mechanism for increasing the competitiveness of national economies is analyzed. Pros and contras of competitive devaluations are considered. Initiated simultaneously in several countries, competitive devaluations neutralize one another. However, individual devaluations usually transmit beggar-thy-neighbor effects abroad, competitive devaluations have accelerated recovery from the Great Depression in 1930s. Economies abandoning the gold standard, devaluing their currencies, and expanding domestic supplies of money and credit recovered more quickly than countries following the contradictory policies.

Particular attention is paid to methods of currency wars, which depend on the exchange rate regime in the country.

The main theoretical and methodological generalizations of currency wars are:

–  the object of currency wars – the exchange rate;

–  the subject of currency wars is the state;

–  methods of currency wars are the traditional tools of macroeconomic policy.

Currency war is an aggressive confrontation between states in the foreign exchange market using the tools of macroeconomic policy aimed to change the exchange rate of national currency in order to obtain competitive advantages in foreign trade due to the deteriorating economic situation of countries - trading partners.

It is found out that currency wars threat to the functioning of national economies (inflation, decreasing growth rates, depriving necessary structural reforms and innovation), and both could destabilize the global economy (provoking mutual devaluations and the collapse of the world monetary system, restore protectionism). Competitive devaluations eliminate the need to carry out structural reforms, technological modernization, introduction of innovative competitive products and services. The monetary policy actions undertaken by central banks have led to complaints of currency wars by some emerging-market economies. Nowadays, currency wars, beggar-thy-neighbor policies undertaken by central banks of depressed economies, are widely criticized for worsening the world’s economic problems.

Conclusions and directions of further researches.

In order to accelerate the economic growth, reduce unemployment and increase exports different countries of the world deliberately devalue their currencies. Getting in response to similar action by the trading partners, the global economy is involved in the currency war - the mutual successive devaluations of the national currencies. The main results of the study are:

- we consider the concept of "currency wars" as an aggressive confrontation between states in the foreign exchange market using the tools of macroeconomic policy. Its aim is to deliberate the exchange rate of the national currency in order to obtain competitive advantages in foreign trade due to the deteriorating economic the situation in countries - trading partners;

- modern methods of foreign wars are summarized. They are divided into direct (currency devaluation, currency intervention) and indirect (reduced interest rate, open market operations, currency issuing (quantitative easing), currency restrictions, devaluation rhetoric and fiscal methods);

- the impact of currency confrontations on the global economy and the economic development of the state are assessed. Despite some distinct examples of the positive impact of currency depreciation for increasing exports currency wars had destructive effects for national economies and for the global economy in particular. Thus, due to the depreciation of currencies of the country's economy receives a separate temporary competitive advantage in foreign trade. However, this stimulus eliminates the need to carry out structural reforms for technological modernization, introduction of innovative competitive products and services. It is grounded that the competitive devaluations are very dangerous for the international trade and need global macroeconomic policy coordination. That is the prospect of further research in this area.


Keywords
exchange rate, currency wars, competitive devaluations, currency interventions, the global monetary system


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