Tipping the Scale? The Workings of Monetary Policy through Trade

IMF Working Papers, June 28, 2017

Source details

Canonical URL

Tipping the Scale? The Workings of Monetary Policy through Trade

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Authors: Gustavo Adler
• Published: June 28, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484303603.001

Summary and research question

• Monetary policy entails demand augmenting and demand diverting effects, with its impact on the trade balance—and spillovers to other countries—depending on the relative magnitude of these opposing effects.
• Using US data and a sign-restricted structural VAR identification strategy, the paper investigates how monetary policy shocks affect the trade balance and the relative importance of demand augmenting versus demand diverting effects.

Methodology

• Data: United States.
• Identification: sign-restricted structural VAR.

Key findings

• Monetary policy has a meaningful impact on the trade balance.
• A monetary loosening leads to a strengthening of the overall trade balance.
• A monetary tightening leads to a weakening of the overall trade balance.
• The above indicates that, on average, demand diversion dominates demand augmenting.
• Distinction by exchange rate regime:
  • Trading partners with fixed exchange rates: only demand augmenting operates.
  • Trading partners with flexible exchange rates: both demand augmenting and demand diverting effects operate, revealing the full effect of monetary policy on trade.
• Spillover heterogeneity:
  • The paper explores differences in spillovers between conventional and unconventional monetary policy.
  • The paper examines changes in spillovers in the postcrisis period, linked to an impaired monetary transmission mechanism.
• Interpretation caveat:
  • Results suggest monetary policy generates spillovers through trade but should not be interpreted as evidence against use of monetary policy per se.

Policy implications and recommendations

• From a global perspective, optimal monetary policy should be assessed in conjunction with deployment of other policy measures.
• Consideration should include the ability of recipient countries to deploy their own policy measures to offset undesirable spillovers.

Content in this bundle

• Tipping the Scale? The Workings of Monetary Policy through Trade, WP/17/142, June 2017
  • Tipping the Scale? The Workings of Monetary Policy through Trade, WP/17/142, June 2017 (Markdown version)
  • Tipping the Scale? The Workings of Monetary Policy through Trade, WP/17/142, June 2017 (PDF)