By Elhanan Helpman, Efraim Sadka
This booklet includes fifteen significant essays on overseas economics. The authors examine 5 central topics: conception and empirics of monetary matters in open economies; fiscal development; public economies; and political financial system. Written to honor Professor Assaf Razin of Tel Aviv and Cornell Universities at the get together of his 60th birthday, the essays pay shut realization to coverage concerns in addition to formal research. The individuals comprise popular experts in foreign economics dependent in North the US, Europe, Israel, and China. This quantity of state-of-the-art study should be of curiosity to students, coverage makers, and complicated scholars alike.
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Extra info for Economic Policy in the International Economy
Even if one is prepared to dismiss rational intertemporal modeling, almost everyone would prefer a version of (3) in which markets expect e to return to some “normal” value, possibly one determined by purchasing power parity. But let us stick with the simplest version. This setup can be regarded as simultaneously determining output y and the exchange rate e. 1 shows how this works. 1. Macroeconomic equilibrium in an open economy: the normal case all the points at which, given (2), the domestic and foreign interest rates are equal.
Balance sheet effects and multiple equilibria, again if the interest rate is already at zero? Then we have the zero-bound or liquidity trap story, which becomes a very serious one if one is depending on monetary policy to avert ﬁnancial crisis. The picture would look like Fig. 5: as y declines the monetary authority would cut i enough to make AA downward-sloping, but once the interest rate is zero there is nothing more it can do, and the AA curve becomes upward-sloping. In that case monetary policy cannot rule out the bad equilibrium, if it exists.
Somewhat surprisingly, this model allows a rough rationale for this strategy. Consider Fig. 2, and imagine that for some reason markets appear to have become convinced that the economy is heading for the crisis equilibrium – a belief that, if unchecked, will become selffulﬁlling. One way to prevent this from happening is to drastically tighten monetary policy, shifting the AA curve so far to the left that it becomes like A A – that is, far enough to rule out the crisis Crises: The Next Generation?