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Currency Wars, Trade Wars, and Global Demand

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  • Jeanne, Olivier

Abstract

This paper presents a tractable model of a global economy in which countries can use a broad range of policy instruments---the nominal interest rate, taxes on imports and exports, taxes on capital flows or foreign exchange interventions. Low demand may lead to unemployment because of downward nominal wage stickiness. Markov perfect equilibria with and without international cooperation are characterized in closed form. The welfare costs of trade and currency wars crucially depend on the state of global demand and on the policy instruments that are used by national policymakers. Countries have more incentives to deviate from free trade when global demand is low. Trade wars lower employment if they involve tariffs on imports but raise employment if they involve export subsidies. Tariff wars can lead to self-fulfilling global liquidity traps.

Suggested Citation

  • Jeanne, Olivier, 2021. "Currency Wars, Trade Wars, and Global Demand," CEPR Discussion Papers 16827, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16827
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    2. Andrés Rodríguez-Clare & Mauricio Ulate & José P. Vásquez, 2020. "Trade with Nominal Rigidities: Understanding the Unemployment and Welfare Effects of the China Shock," NBER Working Papers 27905, National Bureau of Economic Research, Inc.
    3. Wieloch Justyna & Becerril-Torres Osvaldo U. & Vázquez Gabriela Munguía, 2025. "Trade war or currency war? How do import duties translate into the RMB/USD exchange rate?," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 61(2), pages 97-109.
    4. Luca Fornaro & Federica Romei, 2022. "Monetary cooperation during global inflation surges," Economics Working Papers 1814, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2024.
    5. Oleg Itskhoki, 2022. "The Research Agenda: Oleg Itskhoki on Exchange Rate Puzzles and Policies," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 23(2), November.
    6. Bergin, Paul R. & Corsetti, Giancarlo, 2023. "The macroeconomic stabilization of tariff shocks: What is the optimal monetary response?," Journal of International Economics, Elsevier, vol. 143(C).
    7. Masashige Hamano & Francesco Pappadà & Maria Teresa Punzi, 2023. "Optimal Monetary Policy, Tariff Shocks and Exporter Dynamics," Working Papers 2309, Waseda University, Faculty of Political Science and Economics.
    8. Hefeker, Carsten, 2022. "Policy coordination under model disagreement and asymmetric shocks," Economic Modelling, Elsevier, vol. 114(C).
    9. Lloyd, Simon P. & Marin, Emile A., 2024. "Capital controls and trade policy," Journal of International Economics, Elsevier, vol. 151(C).
    10. Chenxin Zhang & Yujie Yang & Wenwen Hou, 2025. "Trade Friction in Two-Country HANK with Financial Friction," Computational Economics, Springer;Society for Computational Economics, vol. 65(1), pages 365-394, January.

    More about this item

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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