Thursday, October 21, 2010

Why currency wars and not protection

This is an interesting take on why there are currency wars. Given flexible monetary policy, there is less need to resort to protectionism. However, if monetary policy is ineffective then we will see a move to capital controls and protectionism. In this case, the Fed is swamping the activities of all other central banks hence countries have to move to other policy choices. A good example is Brazil.

All-Chicago Friends of Economic History Dinner
Speaker: Douglas Irwin (Dartmouth College)

Irwin’s lectures, “Trade Policy Disaster: Lessons from the 1930s,” will be published by MIT Press in 2011 as a part of the series of Ohlin Lectures. Irwin will examine the reasons for the outbreak of protectionist trade policies during the Great Depression.

...“The main reason that countries adopted such draconian anti-trade policies in the early 1930s is that governments lacked other policy instruments with which to address the Great Depression,” Irwin says. “In particular, the gold standard prevented countries from using monetary policy to ameliorate the economic downturn. Countries that left the gold standard and allowed their currencies to depreciate not only recovered more quickly from the Depression, but did not need to restrict trade in a futile attempt to ward off the slump. Protectionism and currency depreciation were substitutes for one another, but depreciation was much better for the world economy than protectionism.

“One lesson for today is that, because most countries have independent monetary policies and flexible exchange rates, they don’t need to resort to import barriers in response to an economic crisis,” he continues.

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