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Thursday, 22 August 2019

Monetary easing won’t solve the world’s trade problems -IMF

Monetary easing won’t solve the world’s trade problems -IMF: The global trend towards monetary easing risks harming trading partners and aggravating existing trade tensions, the IMF has said. Senior IMF economists Gita Gopinath, Gustavo Adler, and Luis Cubeddu write that, although easing can increase domestic demand for foreign goods, it also weakens the exchange rate, producing the opposite effect of lowering demand for imports. This is what is known as ‘expenditure switching.’

Beggar-thy-neighbour: Expenditure switching is described by the IMF as a “beggar-thy-neighbour” policy: a term that refers to economic policies that are introduced to benefit a country’s economy but that simultaneously harm its trading partners. Currency weakening leads to a decline in exports, inflicting economic harm on the countries it trades with.

An ineffective trade policy: What’s more, currency weakening in this way is unlikely to make meaningful improvements to a country’s trade balance. “One should not put too much stock in the view that easing monetary policy can weaken a country’s currency enough to bring a lasting improvement in its trade balance,” they write. “Monetary policy alone is unlikely to induce the large and persistent devaluations that are needed to bring that result.”

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