Trade Wars and the Optimal Design of Monetary Rules / Stéphane Auray, Michael B. Devereux, Aurélien Eyquem.

Format:

• Book

Author/Creator:

• Auray, Stéphane.

Contributor:

• National Bureau of Economic Research.
• Devereux, Michael B.
• Eyquem, Aurélien.

Series:

• Working Paper Series (National Bureau of Economic Research) no. w32451.
• NBER working paper series no. w32451

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2024.

Summary:

Monetary rules may have a large effect on the outcome of trade wars if central banks target the CPI inflation rate or more generally changes in the relative price of traded goods. We lay out a two-country open-economy model with sticky prices where countries engage in trade wars. In the presence of monopoly pricing markups, we show that the final level of tariffs and welfare losses from trade wars critically depend on the design of monetary policy. If central banks adopt a fixed nominal exchange rate or even better target the CPI inflation rate, trade wars are much less intense than those under PPI inflation targeting. We further show that an optimally delegated monetary rule that internalizes the formation of non-cooperative trade policy can actually completely eliminate a trade war, and even act to partly offset the welfare cost of monopoly markups.

Notes:

• Print version record
• May 2024.