Global Implications of a US-Led Currency War

36 Pages Posted: 28 Feb 2020

See all articles by Adam Triggs

Adam Triggs

Australian National University (ANU) - Crawford School of Public Policy

Warwick J. McKibbin

Australian National University

Date Written: February 26, 2020

Abstract

In 2019, President Trump called on the U.S. Federal Reserve to cut interest rates to depreciate the U.S. dollar, which, according to the IMF, is overvalued by between 6 and 12 percent. This paper uses an intertemporal general equilibrium model to explore what would likely happen if the President’s wish was granted. Using the G-Cubed (G20) model, it shows that the general equilibrium effects of a depreciated real effective exchange rate brought about by lower U.S. interest rates can result in a wide variety of unintended consequences, many of which contradict the stated aims of President Trump and his administration. Such a policy would likely result in a larger U.S. trade deficit, would only temporarily devalue the real effective exchange rate and would only temporarily support the U.S. economy. The policy would boost the trade balances of most U.S. trading partners, depreciate China’s exchange rate and boost China’s GDP. Given the policy would make the overvalued exchange rates of many economies even more overvalued, the paper explores what would happen if U.S. trading partners were to retaliate by devaluing their currencies. It shows that this makes it harder for the U.S. to achieve its objectives and forces a more severe adjustment for economies that presently have undervalued exchange rates.

Keywords: econometric modelling, computable general equilibrium models, productivity, monetary policy, fiscal policy, international trade and finance, globalization

JEL Classification: C5, C68, D24, E2, E5, E6, E62, F1, F2, F3, F4, F6

Suggested Citation

Triggs, Adam and McKibbin, Warwick J., Global Implications of a US-Led Currency War (February 26, 2020). CAMA Working Paper No. 17/2020, Available at SSRN: https://ssrn.com/abstract=3544448 or http://dx.doi.org/10.2139/ssrn.3544448

Adam Triggs

Australian National University (ANU) - Crawford School of Public Policy

ANU College of Asia and the Pacific
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

Warwick J. McKibbin (Contact Author)

Australian National University ( email )

Crawfrod School of Public Policy
Canberra, ACT 2600
Australia
02-61250301 (Phone)
02-62735575 (Fax)

HOME PAGE: http://www.sensiblepolicy.com

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