Currency war or international policy coordination?

Abstract

“Currency war” is a meme that will not go away. The term was coined by Brazilian finance Minister Guido Mantega in September 2010 in response to quantitative easing in the United States. Mantega’s implied criticism was that the unconventional monetary policies of the Federal Reserve to ward off deflation and stimulate a depressed economy were beggar thy neighbor. They unleashed a tsunami of capital flows toward emerging markets, resulting in inflation, currency appreciation, loss of competitiveness and worrisome upward pressure on asset prices. Brazilian president Dilma Rousseff invoked the term and echoed her finance minister’s criticism in the spring of 2012 and again on a visit to the White House later in the year. At the end of 2012 and beginning of 2013, when Bank of Japan committed to large-scale asset purchases and the government of newly elected Prime Minister Shinzo Abe looked to raise the central bank’s inflation target, once more there were accusations, this time mainly from Japan’s Asian neighbors, that the country was waging a clandestine currency war.