Currency war: The consequences of global non-cooperative monetary equilibrium

HONG KONG - Those countries whose currencies are appreciating against most others (the US and the UK in particular) will be forced to react to prevent an excessive overvaluation of their currencies, according to a research note from Nataxis.

“We are therefore arriving at a global non-co-operative equilibrium where all monetary policies are too expansionary, because each country wants to weaken its exchange rate and the other countries are reacting by weakening theirs,” BBVA says.

“In theoretical models, this non-co-operative equilibrium does not lead to additional production (as the effects of the different countries’ expansionary monetary policies on competitiveness cancel each other out), but leads to high inflation.

“In contemporary economies, high inflation is replaced by excessively high asset prices, and especially by very low long-term interest rates due to the flow of liquidity into bonds.” www.nataxis.com (ATI).