LONDON (Reuters) – Foreign exchange rates and trade barriers are likely to remain big factors for trade flows, despite some research questioning their importance, Bank of England policymaker Silvana Tenreyro said on Monday.
“The dominance of the dollar in international trade is an important phenomenon,” Tenreyro said in a speech at the BoE.
“But unlike in some of our stylised models, I think that the exchange rate continues to have important effects on export volumes.”
Tenreyro noted that the International Monetary Fund had warned that exchange-rate flexibility may need to be supported by other policies and the Fund’s modelling even suggested that countries with a high degree of dollar pricing might require larger capital controls.
The effects of trade barriers were also likely to be bigger than suggested by purely macroeconomic estimates of the impact of tariffs, she said, noting the increase in tariffs on trade between the United States and China.
“Given the identification difficulties, I am inclined to place more weight on the microeconomic estimates of the direct effects of trade barriers on the economy,” she said.
“Even for large economies such as the U.S., these are likely to be damaging to growth. If the initial effects are amplified by falls in confidence and higher uncertainty, the overall slowdown may be larger still. These consequences will be even more material for smaller economies.”
(Writing by William Schomberg; Editing by Kate Holton)