Currency Unions and Trade: A Post-EMU Mea Culpa

Currency Unions and Trade: A Post-EMU Mea Culpa

Currency Wars? Unconventional Monetary Policy Does Not Stimulate Exports Andrew K. Rose Berkeley-Haas, ABFER, CEPR,NBER Motivation: What are the Export Effects of Unconventional Monetary Policy (UMP)? Were in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness - Brazilian Finance Minister Guido Mantega, Mon Sep 27, 2010, reported by the Financial Times and Reuters A currency war occurs when a country eases monetary policy specifically to depreciate its currency, with the ultimate objective of cheapening its exports and gaining unfair competitive advantage in international trade - Ben Bernanke (2016, p2) Rose: Export Effects of Currency Wars 2 Strategy Use plain-vanilla gravity model of exports Requires neither UMP exogeneity nor instrumental variables Straightforward methodology, data Three assumptions 1. Identify currency wars with unconventional monetary policy UMP: Quantitative easing, negative nominal interest rates, 2. Currency wars are bilateral events between those engaging in UMP and those not Estimate effect of UMP by aggressors on potential victims 3. Focus on export effects of UMP Rose: Export Effects of Currency Wars 3 Preview of Findings Countries that engage in UMP experience drop in exports vis--vis countries that did not engage in UMP, ceteris paribus 1. Quantitative easing associated with drop in exports 10% Highly statistically significant

2. Negative nominal interest rates have similar effect No effect from conditional forward guidance policies Any currency wars have been lost by aggressors! Rose: Export Effects of Currency Wars 4 A Nave Look American Trade around Quantitative Easing Rounds E x p o rts 300 400 500 600 International Trade in Goods and Services, USD bn 2008q1 Im p o rts 400 500 600 700 2005q1 QE1 2005q1 QE3 2011q1 QE1 2008q1 QE2 QE2 2011q1 Rose: Export Effects of Currency Wars 2014q1 2016q2 2014q1 2016q2

QE3 5 But thats Simplistic No obvious pattern: Both exports and imports continue to drop following QE1, trends unaffected by QE2, stagnation unaffected by QE3 But Only US considered Multilateral blurs American exports to importers engaged in their own UMP (EMU, Japan, UK, Switzerland, ) with exports to importers not engaged in UMP No controls at all Rose: Export Effects of Currency Wars 6 Standard Gravity Model Follow Head-Mayer (2014) survey, use Least Squares with Time-Varying Country Dummy Variables: ln(Xijt) = UMPijt + 1CUijt + 2FTAijt + {it} + {jt} + {ij} + ijt is coefficient of interest UMPijt is 1 if i engages in UMP at t and j does not, 0 ow Rose: Export Effects of Currency Wars 7 Estimation LS with many fixed effects on positive export flow observations 11,773 exporter-quarter 12,997 importer-quarter 26,096 exporter-importer FE hold constant any overall effect UMP (or anything else!) had on exports/imports at a point in time estimates pair-specific time-varying export effect of UMP Plausibly exogenous since main UMP export effects through common export effect, {it} is additional effect of belligerent on defender Rose: Export Effects of Currency Wars 8 Data Set

IMF DoTS trade: >200 countries 2000Q1-2016Q4 (with gaps) Exports are US$ average of FOB exports and CIF imports RTAs: WTO Currency Unions: Glick-Rose Rose: Export Effects of Currency Wars 9 Countries Afghanistan Bermuda Colombia Ethiopia Haiti Kuwait Moldova Panama Albania Bhutan Comoros Falkland Islands Honduras Kyrgyz Republic Mongolia Algeria Bolivia Congo, DR Faroe Islands Hungary

Laos American Samoa Bosnia & Herzegovina Congo, Rep Fiji Iceland Angola Botswana Costa Rica Finland Cote d'Ivoire Antigua & Barbuda Brazil Sierra Leone Tajikistan Vietnam Papua New Guinea Singapore Tanzania West Bank & Gaza Montenegro Paraguay Slovak Republic Thailand Yemen Latvia

Morocco Peru Slovenia Timor-Leste Zambia India Lebanon Mozambique Philippines Solomon Islands Togo Zimbabwe France Indonesia Lesotho Myanmar Poland Somalia Tonga Argentina Brunei Darussalam Croatia Gabon Iran Liberia Namibia

Portugal South Africa Trinidad & Tobago Armenia Bulgaria Cuba Gambia Iraq Libya Nauru Qatar South Sudan Tunisia Aruba Burkina Faso Cyprus Georgia Ireland Lithuania Nepal Romania Spain Turkey Australia Burundi

Czech Republic Germany Israel Luxembourg Netherlands Russian Federation Sri Lanka Austria Cambodia Denmark Ghana Italy Macedonia Netherlands Antilles Rwanda St. Kitts & Nevis Tuvalu Azerbaijan Cameroon Djibouti Gibraltar Jamaica Madagascar New Caledonia Saint Helena St. Lucia Uganda

Bahamas Canada Dominica Greece Japan Malawi New Zealand Saint Pierre & Miquelon St. Vincent & Grenadines Ukraine Bahrain Cape Verde Dominican Republic Greenland Jordan Malaysia Nicaragua Samoa Sudan United Arab Emirates Bangladesh Central African Republic Ecuador Grenada Kazakhstan

Maldives Niger Sao Tome & Principe Suriname United Kingdom Barbados Chad Egypt Guam Kenya Mali Nigeria Saudi Arabia Swaziland United States Belarus Chile El Salvador Guatemala Kiribati Malta Norway Senegal Sweden

Uruguay Belgium China, Hong Kong Equatorial Guinea Guinea Korea, North Mauritania Oman Serbia Switzerland Uzbekistan Syria Vanuatu Taiwan Venezuela Belize China, Macao Eritrea Guinea-Bissau Korea, South Mauritius Pakistan Serbia & Montenegro Benin China, Mainland

Estonia Guyana Kosovo Mexico Palau Seychelles Rose: Export Effects of Currency Wars Turkmenistan 10 Measures of Unconventional Monetary Policy 1. QE: 1 for quarters when central bank actively acquiring securities through Quantitative Easing program, 0 ow 2.4% of sample Variant with unusual stocks of assets held (not flow purchases) 2. NNIR: 1 for quarters with Negative Nominal market Interest Rates, 0 ow 2.5% of sample Variant with official policy rates 3. Check with state-contingent forward guidance 0.4% of sample Rose: Export Effects of Currency Wars 11 Measures of Unconventional Monetary PolicyQuantitative Easing Negative Nominal Interest Rates USA, QE1 2008Q4-2010Q1 USA, QE2 2010Q4-2011Q2 USA, QE3

2012Q3-2014Q4 UK, QE1 2009Q1-2010Q1 UK, QE2 2011Q4-2012Q2 UK, QE3 2012Q3-2012Q4 Switzerland 2011Q3- Denmark 2012Q3- Sweden 2015Q1- 2015Q1- Japan 2001Q1-2006Q1 Japan 2010Q4- 2016Q1- EMU 2015Q1- 2014Q2- Rose: Export Effects of Currency Wars 12 Main Results Nuisance Effects

Positive, statistically significant of both controls on (log) exports Good fit Coefficient of Interest () Negative effect of QE on exports -11% ceteris paribus |t-statistic| > 5 Similar effect of NNIR Cannot reject equality of QE, UMP effects No significant effect of state-contingent forward guidance Few obs? No indication of successful currency wars! Rose: Export Effects of Currency Wars 13 Unconventional Monetary Policy and Exports 1 Exp (not Imp) QE (2.4%) Exp (not Imp) NNIR (2.5%) Exp (not Imp) FG (0.4%) Currency Union RTA R2 RMSE 2 -.11** (.02) 3 4 -.09** (.02) .35** (.02) .04** (.01) .89 1.37

.33** (.02) .04** (.01) .89 1.37 .32** (.02) .04** (.01) .89 1.37 Rose: Export Effects of Currency Wars -.02 (.07) .35** (.02) .04** (.01) .89 1.37 5 -.07** (.02) -.05* (.02) .00 (.07) .32** (.02) .04** (.01) .89 1.37 6 -.07** (.02) -.05* (.02) .32** (.02) .04** (.01) .89 1.37

14 Results seem robust Variants of UMP (key regressor) Stocks (not flows) of QE Using official (not market) interest rates Using 1st/4th lag or 1st lead Dropping early or late data Drop exporters engaging in UMP, one by one Drop large sets of importers Drop observations with large outliers Rose: Export Effects of Currency Wars 15 Sensitivity Analysis, 1 Default UMP Variants (Stock QE, Official NNIR) First lag of UMP Fourth lag of UMP First lead of UMP After 2011 Before 2016 Drop 3 outliers Quantitative Easing by Exporter, not Importer -.11** (.02) -.14** (.02) -.10** (.02) -.12** (.03) -.10** (.02) -.06** (.02) -.08** (.02) -.07** (.02) Neg. Nom. Int. Rate in Exporter, not Importer

-.09** (.02) -.10** (.02) -.08** (.02) -.07** (.02) -.09** (.02) -.04* (.02) -.06** (.02) -.06** (.01) Rose: Export Effects of Currency Wars Test for Equality (p-value) .66 .09 .59 .24 .66 .21 .71 >.99 16 Sensitivity Analysis, 2 Drop US as exporter Drop UK as exporter Drop Japan as exporter Drop Denmark as exporter Drop Sweden as exporter Drop Switzerland as exporter Drop Germany as exporter Drop China, HK as exporter Drop Advanced Countries as Importers

Drop Asians DCs as importers Drop Africans as importers Drop Latin/Caribbean as importers Quantitative Easing by Exporter, not Importer Neg. Nom. Int. Rate in Exporter, not Importer Test for Equality (p-value) -.11** (.02) -.11** (.02) -.11** (.02) -.11** (.02) -.09** (.02) -.11** (.02) -.10** (.02) -.10** (.02) -.08* (.04) -.12** (.02) -.09** (.02) -.12** (.02) -.08** (.02) -.09** (.02) -.08** (.02) -.09** (.02) -.07**

(.02) -.08** (.02) -.08** (.02) -.08** (.02) -.12** (.04) -.09** (.02) -.07** (.02) -.10** (.02) .57 Rose: Export Effects of Currency Wars .70 .75 .50 .84 .16 .67 .58 .06 .51 .34 .87 17 Monadic Fixed Effect Event Studies Currency war effect buried within exporter-quarter FE, {it}? Can examine {it} directly Very little movement when country begins to engage in UMP, either QE or NNIR Rose: Export Effects of Currency Wars 18 Exporter-Date Fixed Effects Fixed Effects around Start of Unconventional Monetary Policy Exporter x Date FE from LSDV gravity model with dyadic FE -2 0

0 2 2 4 4 6 Negative Interest Rates 6 Quantitative Easing -4 0 4 -4 0 4 Means with (5,95) confidence interval. 2000Q1-2016Q2 data, >200 countries and territories. Rose: Export Effects of Currency Wars 19 Conclusion Q: Did use of Unconventional Monetary Policy (UMP), deliberately or inadvertently, raise exports to countries that did not use UMP? A: No! Countries using quantitative easing and/or negative nominal interest rates did *not* experience export booms If anything, their exports fell, ceteris paribus Rose: Export Effects of Currency Wars 20

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