Dear IFM members,

      In case the China currency question interests you, the attached paper
is a mere five pages in length.(See attached file:
TreasCurrncyManipApr4-06L10+.pdf)

                                    Abstract

      Since they were first mandated by the US Congress in 1988, there have
been 31 biannual reports from the U.S. Treasury regarding whether
individual trading partners – particularly those in Asia -- were
manipulating currencies for unfair advantage,. In recent years, parallel
to calls on China from American politicians to allow its currency to
appreciate, the Treasury has recommended policy changes and indicated that
it has commenced discussions with its government. There is growing
speculation that the Treasury will soon go the next step, and name China as
an outright currency manipulator, as it did in the early 1990s (and as it
did to Korea and Taiwan in the late 1980s). This paper seeks to test
two competing hypotheses: (1) that the Treasury decisions are determined by
legitimate economic variables – the partners’ overall current account/GDP,
its reserve changes, and the real overvaluation of its currency, and (2)
that the Treasury decisions are determined by variables suggestive of
domestic American political expediency -- the bilateral trade balance, US
unemployment, and an election year dummy. Conclusion: There is strong
evidence that both sorts of variables play a role. The most consistently
significant variable is the bilateral balance.
      An alternative use for the equation is to ask the question what the
Treasury can be expected to find in its report due April 2006, if it acts
in accord with its past behavior. The prediction of a probit version of
the model is that there is a 40 percent chance that China will be named as
a currency manipulator in April 2006, and a 99 per cent chance that it will
at least be reported as meriting bilateral discussions.


Updated versions will be posted as
Are US Treasury Findings of Exchange Rate Manipulation by Asians Based on
Valid Economics or on Political Expediency?, KSG.

available at
http://ksghome.harvard.edu/~jfrankel/currentpubsspeeches.htm#On%20Exchange%20Rate%20Regimes
 .

JF

• application/pdf attachment: TreasCurrncyManipApr4-06L10_.pd

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