Tariffs vs exchange rates
[…] when the internal transmission channel of monetary policy is less effective (at the zero lower bound), the optimal policy mix in reaction to a negative demand shock is reversed: it becomes optimal to increase the import tariff while letting the home currency appreciate in order to compensate the negative impact of the tariff on consumers’ purchasing power. Hence, according to our results, the ZLB may raise the likelihood of non-cooperative policies, but more through tariffs than through monetary policies. In normal times, a country will react to a trade “aggression” through the monetary instrument rather than through trade retaliation.
Trade and Currency Weapons
Authors: Matthieu Bussiere, Agnes Benassy-Quere, Pauline Wibaux
From: Bank of France, Paris School of Economics
Unconventional monetary policy and currency wars
Andrew Rose asks if a currency war initiated by one country’s use of unconventional monetary policy (UMP), whether deliberately or inadvertently, had the consequence of raising its exports to countries that did not use UMP. He uses the IMF’s Direction of Trade data set for the period between 2000 and 2016 and finds that countries engaged in UMP saw their exports – as well as their imports and exchange rates – fall, holding other things constant.
Currency Wars? Unconventional Monetary Policy Does Not Stimulate Exports
Author: Andrew K. Rose
From: University of California – Berkeley
Tariffs, subsidies and taxes on capital flows
When the global economy falls in a liquidity trap countries are tempted to boost their own employment by increasing their share in global demand. If they choose tariffs, the tariffs act as an intertemporal tax on consumption which further reduces demand. Thus, global demand and employment are lower in the Nash equilibrium with tariffs. The opposite is true in the case of export subsidies which act as an intertemporal subsidy on consumption and so stimulates consumption. In the Nash equilibrium in export subsidies full employment is achieved. When instead countries engage in capital wars (tax on capital flows) then a fraction of countries accumulate foreign assets to achieve a trade surplus and full employment, whereas the other countries accept a trade deficit and less than full employment.
Currency Wars, Trade Wars and Global Demand
Author: Olivier Jeanne
From: Johns Hopkins University
