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Because monetary policy has countervailing exchange-rate and income effects on foreign exports, the net effect of a monetary easing on foreign trade should be relatively modest. Indeed, in the case of the United States at least, the evidence is that the two effects largely offset. Of course, in general, there is no guarantee that the two effects of monetary policy on trade will exactly offset. Fortunately, additional protection against the threat of currency wars is enjoyed by countries that maintain flexible exchange rates. Fiscal policy in either the easing country or its trading partners provides an additional potential tool for offsetting the effects of changes in currency values on output and trade.
Beyond the evidence on the countervailing income and exchange-rate effects of U. As Figure 1 shows, trade did help buffer the sharp decline in U.
However, since , net exports account for very little of overall U. Wallach Moreover, a currency war requires currency depreciation.
Figure 2 shows three measures of the value of the U. But the U. That pattern is not consistent with a currency war, at least not a successful one. However, that observation only illustrates the point above that countries with flexible exchange rates have the necessary tools to offset the effects of U.
Indeed, many countries eased monetary policy during this period, in response to a slow global recovery. Ben S. One possibility is that, while the exchange-rate effects of monetary policy are immediate and obvious, the effects operating through higher incomes take longer to develop and are harder to discern. Thus, the adverse effects of Fed easing on foreign exporters via a weaker dollar are more evident and politically more salient to the policymakers and the public abroad than are the beneficial effects of a strengthening U. Foreign policymakers may also dislike seeing their exchange rate appreciate for reasons unrelated to the current state of their economy—for example, they may want to promote exports in the longer run as a development strategy.
Overall, I find little support for the claims that the Fed has engaged in currency wars. Indeed, recent years have seen neither an increase in U. Ben Bernanke.
What did you do in the currency war, Daddy?
Bernanke also served as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. The Hutchins Center on Fiscal and Monetary Policy provides independent, non-partisan analysis of fiscal and monetary policy issues in order to improve the quality and effectiveness of those policies and public understanding of them.
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