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Senior economists at the International Monetary Fund (IMF) have warned countries against relying too heavily on monetary policy easing, and argued that currencies are “neither the hammer nor the nail” in efforts to reinvigorate economies.

With global growth sluggish and inflation low, a host of central banks have recently cut interest rates to prop up their respective economies, with others, such as the ECB (European Central Bank), expected to follow suit later this year.

Cutting interest rates reduces the cost of borrowing in the hope of encouraging consumers and businesses to spend and invest more.

However, in a blog published Wednesday, IMF senior economists Gita Gopinath, Luis Cubeddu and Gustavo Adler warned that the recent surge in monetary easing from both advanced and emerging market economies has created concerns over so-called “beggar-thy-neighbor” policies and fears of a currency war.

Beggar-thy-neighbor refers to international trade policy which aids the country which enacted it while harming its neighbors or trade partners.

Counterproductive tariffs

The IMF report also took aim at what it deemed counterproductive policy options taken by policymakers to mitigate currency overvaluation, such as imposing tariffs on imports from countries perceived to have undervalued currencies.

In addition, the IMF made the case that bilateral tariffs are unlikely to reduce aggregate trade imbalances, instead simply diverting trade elsewhere and harming both domestic and global growth by draining business confidence and investment, disrupting supply chains and increasing costs for producers and consumers.

Solutions

The report advocated that rather than relying on tariffs, deficit countries such as the U.S. and the U.K. should aim to reduce budget deficits without sacrificing growth, and move to strengthen the competitiveness of their export industries. The IMF economists proposed improving investment in workforce skills and encouraging lifelong saving.

For surplus countries like Germany and South Korea, the post suggested fiscal policy deployment in order to invest more in infrastructure, while adopting reforms that encourage private investment, such as tax incentives for research and development or lowering barriers to entry in regulated professions.

The IMF urged both surplus and deficit countries to find durable solutions to trade disputes to address concerns about export subsidies and weak intellectual property protection.