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Currency wars or efficient spillovers?

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  • Anton Korinek

Abstract

In an interconnected world, national economic policies regularly lead to large international spillover effects, which frequently trigger calls for international policy cooperation. However, the premise of successful cooperation is that there is a Pareto inefficiency, i.e. if there is scope to make some nations better off without hurting others. This paper presents a first welfare theorem for open economies that defines an efficient benchmark and spells out the conditions that need to be violated to generate inefficiency and scope for cooperation. These are: (i) policymakers act competitively in the international market, (ii) policymakers have sufficient external policy instruments and (iii) international markets are free of imperfections. Our theorem holds even if each economy suffers from a wide range of domestic market imperfections and targeting problems. We provide examples of current account intervention, monetary policy, fiscal policy, macroprudential policy/capital controls, and exchange rate management and show that the resulting spillovers are Pareto efficient, but only if the three conditions are satisfied. Furthermore, we develop general guidelines for how policy cooperation can improve welfare when the conditions are violated.

Suggested Citation

  • Anton Korinek, 2017. "Currency wars or efficient spillovers?," BIS Working Papers 615, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:615
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    References listed on IDEAS

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    Cited by:

    1. Davis, J. Scott & Devereux, Michael B., 2019. "Capital Controls as Macro-prudential Policy in a Large Open Economy," Globalization Institute Working Papers 358, Federal Reserve Bank of Dallas.
    2. Valerio Nispi Landi, 2018. "Capital controls spillovers," Temi di discussione (Economic working papers) 1184, Bank of Italy, Economic Research and International Relations Area.
    3. repec:eee:jimfin:v:93:y:2019:i:c:p:201-222 is not listed on IDEAS

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    Keywords

    currency wars; international spillovers; policy cooperation; first welfare theorem;

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