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The Senior economists at the International Monetary fund(IMF) have warned countries against relying too heavily on Monetary policy easing, and argue that currencies are neither the hammer nor the nail in efforts to bolster economies. The worldwide growth lethargic and inflation low, a host of Central Banks have recently cut interest rates to buttress up their respective prediction to follow suit later this year. The Cutting interest rates reduce the cost of borrowing in the hope of encouraging consumers and businesses to spend and invest more . The IMF senior economists Gita Gopinath, Luis Cubeddu and Gustavo Adler warned that the recent pitch in monetary easing from both advanced and emerging market economies has created concerns over so called Beggar thy citizen policies and fears of Currency war.
The Beggar Thy neighbor refers to international Trade policy which aids the country which enact it while harming its neighbors or trade partners. The monetary easing can help arouse domestic demand, in turn benefiting other countries by increasing demand for their goods, the IMF articulated apprehension about it weakening of Exchange rates. This makes exports more competitive and reduce command for other countries imports as their prices increase, an effect known as expenditure switching.
The Currency devaluation has become a focal point for worldwide trade tensions. President Donald Trump attacked ECB President Mario Draghi for the Impact of his dovish comments on the assessment of the euro alongside the dollar . The Conventional Monetary space inadequate for some advanced economies, the currency channel of Monetary slackening has received considerable attention the IMF stated. It should not put too much stockpile in the view that lessening monetary policy can weaken a country’s currency enough to bring a lasting improvement in its trade equilibrium through expenditure switching , highlighting that the Expenditure switch collision of a currency weakening is generally minimal . A 10% depreciation on average improves a country’s trade balance by around 0.3% of gross domestic product (GDP) within a 12 month period, primarily through constricting imports, the note highlighted.