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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
     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
     --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:
[TOPICS: M$B$$$,M$E$$$,MT$$$$,M$$BE$]

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