Tue, Nov 06, 2012 - Page 8 News List

Exchange rates key to trade revival

By Chao Wen-heng 趙文衡

That is why my suggestion is that the central bank should continue to focus on stabilizing consumer prices.

However, exchange rate policy will not only affect consumer prices, it is also one of the tools that can revive the economy. One of the missions of the US Federal Reserve is to maximize employment, which is in fact not very different from pursuing economic growth.

Although the central bank is different from the Federal Reserve, it can also devalue the currency to an appropriate degree once consumer prices have been stabilized and pursue economic growth on the premise that doing so will not affect consumer prices. International raw material prices are tending to fall, and if the sluggishness of the major economies continues, we may even see deflation. The right time for a devaluation may be nearing.

The question is if, by doing so, the central bank will be interfering with the foreign exchange market.

Central bankers always say markets must be respected, and Taiwan’s central bank is no exception. The current appreciation of the NT dollar is not the result of an export boom, but of an influx of speculative hot money. A foreign exchange market manipulated by speculative money is no longer operating according to normal market rules.

In addition, Taiwan’s economy is sluggish and the currency is appreciating rather than depreciating. This situation runs contrary to market principles and the central bank thus has legitimate reason to intervene and correct this situation.

Although using the exchange rate to increase exports is not a very elegant solution, it is a solution that will bring about the desired result, in particular since our main competitor is using this very policy.

Chao Wen-heng is an associate research fellow at the Taiwan Institute of Economic Research.

Translated by Perry Svensson

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