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Journal of Globalization and Development

Ed. by Stiglitz, Joseph / Emran, M. Shahe / Guzman, Martin / Jayadev, Arjun / Ocampo, José Antonio / Rodrik, Dani

CiteScore 2018: 0.50

SCImago Journal Rank (SJR) 2018: 0.129
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The Art of Currency Manipulation: How Some Profiteer by Deliberately Distorting Exchange Rates

Kaushik Basu
  • Corresponding author
  • The World Bank, 1818 H Street, DC 20433, NW, Washington; and Department of Economics, Cornell University Ithaca, New York 14853
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Published Online: 2014-02-21 | DOI: https://doi.org/10.1515/jgd-2013-0040


A frequent charge in foreign exchange markets in developing countries is that of manipulators being at work. Since to buy is to raise prices and to sell is to lower prices, the question that naturally arises is whether the widespread charge of market manipulation is valid. The paper shows that (whether or not “widespreadness” has any merit) it is possible for a player to manipulate and profiteer. By using some simple principles of game theory, the paper outlines a strategy that a manipulator may use. The aim of this paper is not to provide a manual for the manipulator but to enable the regulator to understand the art and develop policies to curb manipulation.

Keywords: Cournot oligopoly; currency depreciation; exchange rates; market manipulation

JEL Classification Numbers: F31; L13


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About the article

Corresponding author: Kaushik Basu, The World Bank, 1818 H Street, DC 20433, NW, Washington; and Department of Economics, Cornell University Ithaca, New York 14853, e-mail:

Published Online: 2014-02-21

This is distinct from shorting a currency, where one takes up a position in anticipation of a price change that is exogenous to oneself, and on which much has been written.

The modeling of markets where there are oligopolistic (and oligopsonistic) players on the two sides of the market, some buying dollars because they can put them to high-valued use and some selling dollars because they have access to cheap dollars, requires an adaptation of the standard model of either oligopoly or oligopsony. Adapting some pre-existing work of a very different nature (e.g., Armstrong 2006), this is not hard to do. But in this paper I shall confine our attention to a case where all big players happen to be on the same side of the market.

I am also ruling out here the presence of foreign exchange hedging. In reality, when there is expectation of some fluctuation in the exchange rate market, many players do go in for complex hedging strategies (see, e.g., Ware and Winter 1988; Brown 2001). But for reasons of simplicity, this is ruled out in the present model.

It is being assumed the currency manipulator is a new agent that comes into the foreign exchange market. It is entirely possible to think, instead, in terms of one of the dealers turning manipulator. This simply entails changing n to (n–1) in equation (6) and also in (7).

In this sense the manipulator is like a Stackelberg leader (as in, for instance, Basu and Singh 1990). However, in this paper we do not work out the sub-game perfect equilibrium but simply show how the manipulator or the Stackelberg leader can make a profit.

Citation Information: Journal of Globalization and Development, Volume 4, Issue 2, Pages 199–211, ISSN (Online) 1948-1837, ISSN (Print) 2194-6353, DOI: https://doi.org/10.1515/jgd-2013-0040.

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