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This sets off a damaging dynamic, described first by my former colleague Ted Truman, as "competitive non appreciation." Over time, more and more countries face stronger pressure to lean against the market forces pushing up the value of their currencies. The collective impact of this behavior risks either causing inflation and asset bubbles in emerging economies, or else depressing consumption growth and intensifying short-term distortions in favor of exports.
This is a multilateral problem. It is unfair to countries that were already running more flexible regimes and let their currencies appreciate. And it requires a cooperative approach to solve, because emerging economies individually will be less likely to move, unless they are confident other countries would move with them.

This problem exposes once again the need for an effective multilateral mechanism to encourage economies running current account surpluses to abandon export-oriented policies, let their currencies appreciate, and strengthen domestic demand. This is a necessary complement to the adjustments being undertaken by countries running current account deficits. A cooperative rebalancing of policy in this direction would be better for overall growth.
...we believe it is very important to see more progress by the major emerging economies to more flexible, more market-oriented exchange rate systems. This is particularly important for those countries whose currencies are significantly undervalued.
In a speech today at the Brookings Institute,[link widoczny dla zalogowanych], Tim Geithner articulated the administration's growing frustration with China,[link widoczny dla zalogowanych], and gave a hint at what mechanism they might use to go after them over yuan manipulation.
This is a problem because when large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same.
Here is the relevant section of the speech, and at the bottom we've highlighted the key comments regarding the IMF.
Aw-kward!
This issue was well-known to the group of economists who gathered in Bretton Woods, New Hampshire, to refashion the war-ravaged global financial system in 1944. The Articles of Agreement of the IMF, drafted at that conference,[link widoczny dla zalogowanych], contain a now-obscure paragraph calling on the Fund to issue reports on countries with "scarce currencies"--what today we would call countries running persistent surpluses--"setting forth the causes of the scarcity and containing recommendations designed to bring it to an end." That clause now reads like a relic of a bygone monetary era. But the problem it was drafted to address--the threat to global financial stability posed by persistent, large surpluses--is as salient today as it was then.