MNI POLICY: BOE Tenreyro: Models Understate Trade Barrier Hit

--Tenreyro Sceptical Of Macro-Models Showing Small Hit From Trade Barriers

By David Robinson

     LONDON (MNI) - Bank of England Monetary Policy Committee member Silvana

Tenreyro set out in a speech Monday how macro-models may underestimate the

impact of higher trade barriers, and how local currency depreciation can still

boost competitiveness despite the prominence of the U.S. dollar in global

commerce.

     Her speech highlighted the risks of using partial equilibrium models to

assess economic impacts and also spelled out the case to gather detailed

evidence to establish whether theoretically appealing ideas hold weight in the

real world.

     In her John Flemming Memorial Lecture, delivered at the BOE, Tenreyro did

not directly address current policy settings.

     --Recent research, cited by Bank of England Governor Mark Carney among many

others, has highlighted how the U.S. dollar plays a disproportionate role in

trade, with around half of global trade invoiced in dollars.

     Tenreyro took exception to the view that this entails that local currency

depreciations would have a much reduced, or non-existent, role in boosting

exports even if the dollar price is unaltered.

     She said that local currency depreciations could increase exporters'

profitability, as export prices would rise relative to labour costs, and

products and services that were previously not competitive could become so.

     "I think that the exchange rate continues to have important effects on

export volumes," she said.

     --Tenreyro echoed recent commentary from the BOE that while macro-models

suggest that the impact of higher trade barriers around the world are slight, in

reality the impact could be sizeable.

     She said that micro-research showed trade barriers impacting

diversification of supplies, driving up trade volatility, hitting confidence and

pushing up uncertainty.

     She would "caution against taking the simple macroeconomic estimates of the

effect of trade policy at face value" and placed more weight on micro work

showing higher trade barriers were damaging to growth, particularly for smaller

economies.

     --Tenreyro also cast doubt on the "doom loop" which assumes that if

government bonds make up a large chunk of domestic bank assets, then a fall in

the their price reduces the banks' net worth and hampers their lending to the

real economy, creating a negative feedback loop.

     She said that euro area evidence showed little difference in the

amplification effect in core and periphery countries and little relationship to

the initial exposure of banks to domestic bonds.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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