by Surjit S. Bhalla
Experts have long questioned the effect of currency undervaluation on overall GDP growth. They have viewed the underlying basis for this policy—intervention in currency markets to keep the price of the home currency cheap—as doomed to failure on both theoretical and empirical grounds. Moreover, the view has been that overvalued currencies hurt economic growth but undervalued currencies cannot help in growth acceleration. A parallel belief has been that the real exchange rate—that is, a country's competitive ranking—cannot be affected by merely changing the nominal exchange rate. This view is grounded in the belief, and expectation, that inflation follows any devaluation of currency. Hence, the conclusion that the real exchange rate cannot be affected by policy.
However, given China's remarkable performance in recent decades, this traditional view is being reexamined. China devalued its currency by large amounts in the 1980s and early 1990s; instead of inflation, it achieved high growth. Today, there is near-universal demand for China to significantly revalue its currency.
This book examines the veracity of various propositions relating to currency misalignments, and their effect on various items of policy interest. The author subjects more than a century of global exchange rate management and growth outcomes to rigorous empirical analysis and demonstrates convincingly that a country can systematically devalue and yet prosper.
The analysis helps in interpreting several phenomena, especially for the last three decades, which have witnessed high economic growth in developing countries, a widening of global imbalances, and a sharp increase in reserve accumulation, particularly among high-growth Asian economies. The book shows that these events are strongly linked via a consistent policy of currency undervaluation in Asian economies.
Selected chapters and sections are provided for preview only.
1. Introduction [pdf]
2. Determinants of Economic Growth [pdf]
3. Currency Valuation, Savings, and the Current Account
4. Measuring Currency Valuation
5. The Yin and Yang of Investment
6. Is the Real Exchange Rate Endogenous?
7. Rashomon Rules: US Dollar, Euro Dollar�
8. Currency Valuation and Growth
9. Policy Failures and Growth Miracles [pdf]
10. Mercantilism and Miracles
11. Institutions versus Exchange Rate Policy [pdf]
12. Currency Undervaluation: A Time-Tested Policy for Growth [pdf]
13. Economics of the Yen and the Renminbi
14. Changing Times, Changing Views
Appendix A Data and Methods
Appendix B Bhalla (2007a) Dataset Extended to 2011
Want Growth? Try Devaluing
Book mention in the Wall Street Journal
October 10, 2012
Rising Yuan in the Land of Setting Yen
Book mention in the Hindu
October 10, 2012
Analysis: China's Currency Foray Augurs Geopolitical Strains
Book mention via Reuters
October 3, 2012
Devaluing to Prosperity: Misaligned Currencies and Their Growth Consequences
Book release event at the Peterson Institute for International Economics
September 17, 2012
Economists: QE3 Shouldn't Trigger Wall of US Money Into Emerging Markets
Book mention in the Wall Street Journal
September 14, 2012
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ISBN Paper 978-0-88132-623-9
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Commentaries on This Book
"Hardly anyone on earth could have or would have written this fascinating book. Its combination of scholarly erudition, technical economics, and horse sense is rare enough. Throw in Bhalla’s talent with prose and his flair for being an agent provocateur, and you have something truly unique. Read it and learn. Read it and think. Read it and be provoked."
——Alan S. Blinder, Professor of Economics and Public Affairs, Princeton University
"Surjit Bhalla makes a profound and important argument about the growth process and the international monetary system. The issues he raises go back to the founding of economics as a discipline, but are immediately relevant to pressing policy issues all over the world. Everyone concerned with the future of the global economy will need to consider Bhalla’s extensive arguments. Whether you agree or disagree, this is a very important book."
——Lawrence H. Summers, former Director of the White House National Economic Council and Charles W. Eliot University Professor at Harvard University's Kennedy School of Government
"Surjit Bhalla presents a highly readable, topical, and provocative analysis of the role of currency misalignments buttressed by extensive empirical analysis. He argues that keeping the currency undervalued helps growth, and the effect is stronger than that of well-functioning institutions, but he also argues that misalignment creates vulnerability in the international system. The IMF must obviously look more closely into these issues in its multilateral surveillance and also in the analysis it does for the G-20."
——Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission of India and first Director of the Independent Evaluation Office, International Monetary Fund
"Surjit Bhalla has written a brilliant and important book. It marshals evidence from 180 countries over 150 years to show conclusively that deliberate currency undervaluation is a powerful policy by which countries have boosted their economic growth substantially over long periods. In passing, he demolishes much theoretical conventional wisdom which denies this possibility. This superbly researched and highly readable volume is compulsory reading for all serious policy economists."
——Shankar Acharya, former Chief Economic Adviser to the Government of India