Trade and Currency Weapons

50 Pages Posted: 23 Aug 2018

See all articles by Agnès Bénassy-Quéré

Agnès Bénassy-Quéré

Paris School of Economics (University Paris 1)

Matthieu Bussière

Banque de France

Pauline Wibaux

University Paris-Sorbonne

Date Written: June 20, 2018


The debate on trade wars and currency wars has re-emerged since the Great recession of 2009. We study the two forms of non-cooperative policies within a single framework. First, we compare the elasticity of trade flows to import tariffs and to the real exchange rate, based on product level data for 110 countries over the 1989-2013 period. We find that a 1 percent depreciation of the importer’s currency reduces imports by around 0.5 percent in current dollar, whereas an increase in import tariffs by 1 percentage point reduces imports by around 1.4 percent. Hence the two instruments are not equivalent. Second, we build a stylized short-term macroeconomic model where the government aims at internal and external balance. We find that, in this setting, monetary policy is more stabilizing for the economy than trade policy, except when the internal transmission channel of monetary policy is muted (at the zero-lower bound). One implication is that, in normal times, a country will more likely react to a trade “aggression” through monetary easing rather than through a tariff increase. The result is reversed at the ZLB.

Keywords: tariffs, exchange rates, trade elasticities, protectionism

JEL Classification: F130, F140, F310, F600

Suggested Citation

Benassy-Quere, Agnes and Bussiere, Matthieu and Wibaux, Pauline, Trade and Currency Weapons (June 20, 2018). CESifo Working Paper Series No. 7112, Available at SSRN: or

Agnes Benassy-Quere (Contact Author)

Paris School of Economics (University Paris 1) ( email )

106-112 boulevard de l'Hopital
Paris, F-75013
+33 1 44 07 82 19 (Phone)


Matthieu Bussiere

Banque de France ( email )


Pauline Wibaux

University Paris-Sorbonne ( email )

1 rue Victor Cousin
Paris, IL 75005

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