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Atlanta Marriott Marquis, A601
American Economic Association
Trade and Currency Wars in the 21st Century
Friday, Jan. 4, 2019 2:30 PM - 4:30 PM
- Chair: Olivier Blanchard, Peterson Institute for International Economics
Currency Wars, Trade Wars and Global Demand
AbstractI present a tractable model of a global economy in which countries attempt to boost their employment and welfare by depreciating their currencies and making their goods more competitive – a "currency war" – or by imposing a tariff on imports – a "trade war." Because of downward rigidity in nominal wages the global economy may be in a liquidity trap with less than full employment. In such a situation a trade war further depresses global demand and leads to large welfare losses (amounting to about 10 percent of potential GDP under our benchmark calibration). By contrast, currency war in which countries depreciate their currencies by raising their inflation targets restores full employment and leads to large welfare gains. The uncoordinated use of capital controls leads to symmetry breaking, with a fraction of countries competitively devaluing their currency and lending their surpluses to deficit countries at a low interest rate.
The Macroeconomic Effects of Trade Tariffs : Revisiting the Lerner Symmetry Result
AbstractWe study the robustness of the Lerner symmetry result in an open economy New Keynesian model with price rigidities. While the Lerner symmetry result of no real effects of a combined import tariff and export subsidy holds up approximately for a number of alternative assumptions, we obtain quantitatively important long-term deviations under complete international asset markets. Direct pass-through of tariffs and subsidies to prices and slow exchange rate adjustment can also generate significant short-term deviations from Lerner. Finally, we quantify the macroeconomic costs of a trade war and find that they can be substantial, with permanently lower income and trade volumes. However, a fully symmetric retaliation to a unilaterally imposed border adjustment tax can prevent any real or nominal effects.
Trade and Currency Weapons
AbstractThe debate on currency wars has re-emerged in the wake of the exceptionally accommodative monetary policies carried out after the 2008 global financial crisis. Using product level data for 110 countries over the 1989-2013 period, we estimate trade elasticities to exchange rates and tariffs within the same empirical specification, using a gravity approach. We find that the impact of a 10 percent depreciation of the exporter country’s currency is "equivalent" to a cut in the power of the tariff in the destination country in the order of 2.4 to 3.4%. We then study the policy implications of these results based on a stylized macroeconomic model where the government aims at internal and external balance. We find that monetary and trade policies are imperfect substitutes and that the former is more effective in stabilizing output, except when the internal transmission channel of monetary policy is muted (at the zero-lower bound). One implication is that, in normal times, a country will more likely react to a trade aggression through monetary easing than through a tariff increase.
University of Cambridge
University of California-Davis
- F3 - International Finance
- F1 - Trade