An Era of Currency Wars?

Bundesbank President Jens Weidmann recently warned that the erosion of central-bank independence would trigger competitive exchange-rate devaluations. In fact, central banks' increased vulnerability to political pressure does not portend a "currency war, but rather reflects the severe constraints on monetary and fiscal policy.

LONDON – Once again, the risk of “currency wars” has been invoked by a leading policymaker. The term was coined in 2010 by Brazil’s finance minister, Guido Mantega, to criticize successive rounds of so-called quantitative easing by advanced countries’ central banks, which sent capital fleeing to developing countries in search of higher yields, driving up these countries’ exchange rates in the process.

This time, Bundesbank President Jens Weidmann is warning that the erosion of central-bank independence in some countries – reflected in the Bank of Japan’s recent decision to buy an unlimited number of government bonds to meet its new inflation target of 2% – will trigger competitive exchange-rate devaluations.

Indeed, Weidmann views the BoJ’s decision as an alarming sign of central banks’ growing tendency to bow to political pressure. He cautions that, if central banks’ mandates expanded to include, implicitly or explicitly, economic growth, they would move too close to the political sphere, undermining their independence and credibility.

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