Currency Wars, Trade Wars and Global Demand

Jeanne, Olivier

Currency Wars, Trade Wars and Global Demand

Economics Working Paper Archive from The Johns Hopkins University,Department of Economics

Abstract: This paper presents a tractable model of a global economy in which countries can use a broad range of policy instruments---the nominal interest rate, taxes on imports and exports, taxes on capital flows or foreign exchange interventions. Low demand may lead to unemployment because of downward nominal wage stickiness. Markov perfect equilibria with and without international cooperation are characterized in closed form. The welfare costs of trade and currency wars crucially depend on the state of global demand and on the policy instruments that are used by national policymakers. Countries have more incentives to deviate from free trade when global demand is low. Trade wars lower employment if they involve tariffs on imports but raise employment if they involve export subsidies. Tariff wars can lead to self-fulfilling global liquidity traps.

Keywords: Tariff; exchange rate; capital control (search for similar items in EconPapers)
Date: 2021-12-17
New Economics Papers: this item is included in nep-int, nep-mon, nep-opm and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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http://jhir.library.jhu.edu/handle/1774.2/66667

Related works:
Working Paper: Currency Wars, Trade Wars, and Global Demand (2021)
Working Paper: Currency Wars, Trade Wars, and Global Demand (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:jhu:papers:66667

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