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A Simple Global Perspective on the US Slowdown, Boom-Bust Cycles and the Rise of Protectionism

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  • Juan Pablo Medina
  • Pablo García

Abstract

The global economy has experienced several significant developments during the recent years: the rising role of giant Asian economies in international trade; the 2008 financial crisis and the ensuing Great Recession in the US, with its propagation to the rest of the world; the sharp rise and subsequent burst of commodity prices over 2006-2009. In this paper we use a multi-region DSGE model for the global economy as a simple framework to understand the global response to these shocks and the importance of the propagation to different regions. The model is equipped to jointly determine exchange rates, trade balances and commodity prices across the world. We carry out several simulations with the model. First, we consider the US slowdown and its international propagation. Second, we explore a global boom-bust cycle driven by overoptimistic forecasts for productivity and their relationship with current account rebalancing. Finally, we analyze the global economic consequences of protectionism. We find that the effects in commodity prices, global output and demand tend to be amplified if the real exchange rates and real wages are more sluggish to adjust in some regions.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 529.

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Date of creation: Oct 2009
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Handle: RePEc:chb:bcchwp:529

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  1. Christopher J. Erceg & Luca Guerrieri & Christopher Gust, 2006. "SIGMA: A New Open Economy Model for Policy Analysis," International Journal of Central Banking, International Journal of Central Banking, vol. 2(1), March.
  2. Nir Jaimovich & Sergio Rebelo, 2007. "News and Business Cycles in Open Economies," NBER Working Papers 13444, National Bureau of Economic Research, Inc.
  3. Elekdag, Selim & Lalonde, Rene & Laxton, Doug & Muir, Dirk & Pesenti, Paolo, 2008. "Oil Price Movements and the Global Economy: A Model-Based Assessment," CEPR Discussion Papers 6700, C.E.P.R. Discussion Papers.
  4. Hamid Faruqee & Douglas Laxton & Dirk Muir & Paolo Pesenti, 2005. "Smooth Landing or Crash? Model-Based Scenarios of Global Current Account Rebalancing," NBER Working Papers 11583, National Bureau of Economic Research, Inc.
  5. Nir Jaimovich & Sergio Rebelo, 2009. "Can News about the Future Drive the Business Cycle?," American Economic Review, American Economic Association, vol. 99(4), pages 1097-1118, September.
  6. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
  7. Blanchard, Olivier J & Galí, Jordi, 2008. "The Macroeconomic Effects of Oil Shocks: Why are the 2000s so Different from the 1970s?," CEPR Discussion Papers 6631, C.E.P.R. Discussion Papers.
  8. Schmitt-Grohé, Stephanie & Uribe, Martín, 2009. "What’s News in Business Cycles," CEPR Discussion Papers 7201, C.E.P.R. Discussion Papers.
  9. Beaudry, Paul & Portier, Franck, 2004. "An exploration into Pigou's theory of cycles," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1183-1216, September.
  10. Manuel Marfán & Juan Pablo Medina & Claudio Soto, 2009. "Overoptimism, Boom-Bust Cycles and Monetary Policy in Small Open Economies," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 14, pages 563-600 Central Bank of Chile.
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Cited by:
  1. Lin, Justin Yifu & Martin, William J., 2009. "The Financial Crisis and Its Impact on the Global Agricultural Landscape," 2009 Conference, August 16-22, 2009, Beijing, China 53208, International Association of Agricultural Economists.

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