Do currency manipulations hurt US bilateral trade balance?

• Published in: Eurasian economic review 2023-03, Vol.13 (1), p.127-144
• Main Authors: Aftab, Muhammad, Bahmani-Oskooee, Mohsen, Karamelikli, Huseyin
• Format: Article
• Language: English
• Subjects: Balance of trade; Central banks; Currency; Economics; Economics and Finance; Foreign exchange markets; Foreign exchange rates; International agreements; International trade; Manipulation; Original Paper; Regulation; Time series
• ISSN: 1309-422X; 2147-429X
• DOI: 10.1007/s40822-023-00225-z

Currency manipulations, the intentional intervention in the foreign exchange market by a country’s government or central bank, have been a contentious issue in international trade. However, empirical evidence on the matter is scarce. This study aims to fill this gap by investigating the effect of currency manipulations on the US bilateral trade balance with its major trading partners over a long-term period of 2000Q4 to 2020Q2. By using a novel currency manipulation index based on the US Treasury-defined variables and a combination of time series and panel cointegration approaches, this study uses a dataset of 21 major trading partners of the US. The analysis shows that currency manipulations have a statistically significant negative effect on the US bilateral trade balance with some country-level heterogeneity. The study provides new insights on the role of currency manipulations in international trade and implies that the findings have significant policy implications. By providing evidence of the detrimental effect of currency manipulations on trade balance, this study supports the argument for the need of international agreements and regulations to discourage such practices and promote fairness in global trade.