Munich Personal RePEc Archive

Protectionist Trade Barriers to Threaten Policy-induced Debt Trap

Xing, Victor (2018): Protectionist Trade Barriers to Threaten Policy-induced Debt Trap.

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BIS working paper highlighted monetary authorities’ asymmetrical policies that are “too timid” in leaning against financial booms but too aggressive and persistent in leaning against financial busts, thus giving rise to a debt trap. Disinflationary effects of globalization induced persistent policy accommodation and encouraged leveraged risk-taking, and the ensuing systemic vulnerability to higher interest rates are at risk from protectionist trade policies. Tariff-induced price pressure and rising federal deficits as a result of tax reform would exacerbate effects of global quantitative tightening (waning unconventional easing) and threaten the post-crisis “lower for longer” paradigm. Heightened volatility as a result of higher bond yields would increase the likelihood of dovish Fed policy reactions, for both the U.S. and other advanced economies cannot tolerate higher interest rates under a policy-led debt trap.

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