Column: Root causes of currency wars

Simon J Evenett

Once dismissed as self-serving grandstanding by the Brazilian finance minister in 2010, claims that the world is closer to a currency war have returned. This time, the proximate cause appears to be the publicly-stated policies of the new Japanese government aimed at shaking off a decades-long economic malaise. Is this another flash in the pan—or are there deeper factors at work?

The recurring ‘currency wars’, however, are not random, inconsequential events. Until the economies of the major trading powers recover or there is a significant shift in national policy mixes, we should expect the currency war to keep breaking out like a rash.

There is an air of resignation—almost of inevitability—to some commentary on today’s currency war. Broken down, the argument goes like this. It starts by noting the widely shared view that one of the major lessons from the 1930s is that economic crises such as these require active monetary policy. Pumping liquidity into the banking system, etc, is seen by many as a legitimate role of central banks during crises.

When interest-rate differentials and exchange-rate movements have adverse knock-on effects for trading partners, then accusations of currency war follow. While the major industrial economies remain in the doldrums, differences in timing of monetary policy easing and the like will result in repeated charges of beggar-thy-neighbour policymaking and so the currency war reads like a book with many chapters. Before unpacking this chain of logic a little more,

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