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Trade Wars, Currency Wars

Stéphane Auray, Michael Devereux () and Aurélien Eyquem

No 27460, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: For most of the post WWII period, until recently, trade protectionism followed a downward trend, and was formulated in multilateral or bilateral agreements between countries. Recently however, there hasbeen a sharp shift towards unilateral, discretionary trade policy focused on short term macroeconomic objectives, and as a consequence, the use of trade policy has become entangled with that of monetary policy. This paper explores the consequences of this shift within a standard DSGE open economy macroeconomic model. We find that a discretionary non-cooperative approach to trade policy can significantly worsen macroeconomic conditions. Moreover, the stance of monetary policy has major implications for the degree of protection in a non-cooperative equilibrium. In particular, cooperative determination of monetary policy implies an increase in both equilibrium tariffs and inflation, and a significant fall in welfare. By contrast, when the exchange rate is pegged by one country, equilibrium rates of protection are generally lower, but in this case, there are multiple asymmetric equilibria in tariff rates which benefit one country relative to another. We also explore the determination of non-cooperative tariffs in a situation where monetary policy is constrained by the zero lower bound on nominal interest rates.

JEL-codes: F30 F40 F41 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-int, nep-mon and nep-opm
Note: IFM
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Related works:
Working Paper: Trade Wars, Currency Wars (2020)
Working Paper: Trade Wars, Currency Wars (2020)
Working Paper: Trade Wars, Currency Wars (2020)
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