Senior economists at the International Monetary Fund (IMF) have warned countries not to rely too much on monetary policy relief, arguing that currencies are not "neither the hammer nor the nail" in an attempt to revive the economies.
With global growth slow and low inflation, a number of central banks have recently reduced interest rates to support their respective economies, with others, such as the ECB (European Central Bank), which is expected to follow later this year.
the cost of borrowing in the hope of encouraging consumers and businesses to spend and invest more.
However, in a blog published Wednesday, IMF economists Gita Gopinath, Luis Cubeddu and Gustavo Adler warned that the recent increase in financial relief from both advanced and emerging market economies has raised concerns about so-called "beggar-your-neighbor" policies and fears of a currency war.
Beggar-thy-neighbor refers to international trade policy that helps the country that adopted it while hurting its neighbors or trading partners.
While monetary easing may help stimulate domestic demand and benefit other countries by increasing demand for their goods, the IMF expressed concern that exchange rates were weakening. This makes exports more competitive and reduces demand for other countries' imports as prices rise, an effect known as "spending swap."
Exchange rate devaluation has become a focal point for global trade tensions. Earlier this month, the United States formally accused China of currency manipulation, while President Donald Trump in June attacked ECB President Mario Draghi for the impact of his lazy comments on the value of the euro against the dollar.
"With conventional monetary space limited for some advanced economies, this monetary easing channel has received considerable attention," the IMF note said.
"But one should not put too much stock in the belief that a monetary policy easing could weaken a country's currency enough to lead to a lasting improvement in the trade balance through the exchange of expenses."
Monetary policy is unlikely to induce the "major and sustained devaluations" required to achieve the lasting improvement, the Post concluded, emphasizing that the costs of switching the effects of a currency depreciation are generally minimal.
Over a three-year period, this increases to 1.2% of the GDP improvement in the trade balance as exports respond more meaningfully to exchange rate movements, although the "full spending switching effect is still relatively modest," it added.
Counterproductive Tariffs  The IMF report also aimed at what it considered counterproductive policy alternatives taken by policy makers to curb the currency overvaluation, such as introducing tariffs on imports from countries perceived to have undervalued currencies.
The economists emphasized that tariffs and exchange rates work differently insofar as a 10% tariff will not necessarily offset a 10% overvaluation of an exchange rate, pointing to the example of recent developments in the US-China trade war.
"Since the beginning of 2018, the average U.S. tariff for goods imported from China has increased by about 10 percentage points, and it would increase by another 5 percentage points if recently announced plans to impose additional taxes are carried out," the economists said.  "Meanwhile, the renminbi has depreciated by about 10% against the dollar, largely as a result of these trading actions and associated uncertainties – the increased flexibility of the renminbi has made it possible to buffer against trade shocks."
While one might suggest that the impact of higher tariffs on Chinese imports will be offset by a stronger dollar as Chinese goods become cheaper, the reality is that US importers and consumers bear the customs duty.
"The reason: the stronger US currency has so far had a minimal impact on the dollar prices Chinese exporters receive due to billing of dollars," the report added.
In addition, the IMF made the case that bilateral tariff rates are not likely to reduce overall trade imbalances, instead of simply diverting trade elsewhere and damaging both domestic and global growth by losing business confidence and investment, disrupting supply chains and increasing costs. for manufacturers and consumers.
The report argued that rather than relying on tariffs, deficit countries such as the United States and the United Kingdom should aim to reduce budget deficits without sacrificing growth, and move to strengthen the competitiveness of their export industries. IMF economists proposed improving labor force investments and encouraging lifelong savings.
For surplus countries such as Germany and South Korea, the post suggested fiscal deployment to invest more in infrastructure, while enacting reforms that encourage private investment, such as capital spending. tax incentives for research and development or lowering barriers to entry into regulated professions.
Over the past week, Germany has shifted the tone of possible fiscal stimulus, with German Finance Minister Olaf Scholz saying that the government is ready to inject $ 55 billion if the economy into recession.
The notice also urged China to reform state-owned enterprises, improve the social security network, open more sectors for private and foreign investment and remove barriers to trade.
The IMF urged both surplus and deficit countries to find sustainable solutions to trade conflicts to address concerns about export subsidies and weak intellectual property protection.
"There are serious problems to deal with, such as increasing inequality and slow growth. Currencies are neither the hammer nor the nail," it concluded.