Case Study and Application on the Effects of Currency Manipulation

Abstract

seek ways to increase the viability of their currencies. One vehicle that facilitates this is the International Monetary Fund, and more specifically, special drawing rights currencies. Historical special drawing rights currencies have included the United States dollar, the British pound sterling, the euro, and the Japanese yen. Most recently, the Chinese yuan has been added to this basket. It is important to assess how the inclusion of the Chinese yuan will change China’s economy. Because China exports so many goods, it is advantageous to China to devalue the yuan with respect to its trade partners such as the dollar in order to keep Chinese goods competitive on the global market. On the other hand, the acceptance of the yuan in the special drawing rights basket will stabilize its value, if not cause an increase. Additionally, improvements in China’s infrastructure as well as increased capitalist measures undertaken by the government have caused appreciation in the yuan. This thesis will use a case study of Switzerland’s attempt to peg its currency to the euro as an exploration of currency manipulation to evaluate whether such currency manipulation by a government is effective. A historical basis provided by examples such as the dollar and euro will inform some of the research for this paper. This thesis will also draw upon data about currency exchange valuations over time. Possible lessons from the Eurozone may be applied to the discuss implications of currency manipulation. Policy recommendations based on these lessons, such as the aftermath of the depegging of Switzerland’s currency from the euro, will be applied to other currency situations as well. From a hypothesis that currency manipulation is not as attractive as it may seem and has many downsides, this thesis concludes that policymakers should recommend against currency manipulation because of its deleterious effects. Furthermore, it is unlikely that China is actively engaging in currency manipulation.