Work

Currency Wars, Trade Wars, and Global Demand

Year: 2021

Type: report

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.

Source: National Bureau of Economic Research

DOI: 10.3386/w29603

Author: Olivier Jeanne

Institutions: University of Southern California, Federal Reserve, National Bureau of Economic Research, Johns Hopkins University, Georgia State University, University of Virginia, Graduate Institute of International and Development Studies

Language: English

Topic: Global Financial Crisis and Policies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: green

OpenAlex ID: W4200418864

Cites: 35

Cited by: 24

Related to: 10