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Tipping the scale? The workings of monetary policy through trade

Gustavo Adler and Carolina Osorio Buitron

Review of International Economics, 2020, vol. 28, issue 3, 744-759

Abstract: The monetary policy entails demand‐augmenting and diverting effects, and its impact on the trade balance—and on other countries—depends on the magnitude of these opposing effects. Using U.S. data and a sign‐restricted structural vector autoregressive identification, we investigate the importance of these effects. Overall, the results indicate that a monetary loosening (tightening) leads to a strengthening (weakening) of the overall trade balance, indicating that demand diversion dominates. The paper also explores changes in the effects following the global financial crisis, reflecting the impaired monetary transmission mechanism.

Date: 2020
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