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Policies to Rebalance the Global Economy After the Financial Crisis

  • Charles Freedman

    (Scholar in Residence, Economics Department, Carleton University)

  • Michael Kumhof

    (Research Department, Modeling Division, International Monetary Fund)

  • Douglas Laxton

    (Research Department, Modeling Division, International Monetary Fund)

  • Dirk Muir

    (Research Department, Modeling Division, International Monetary Fund)

This paper considers some of the main risks and opportunities currently facing the world economy. Against a baseline forecast of October 2009, it first discusses a number of policy mistakes or policy failures that could lead to even worse outcomes than currently envisaged. It then describes the policy choices that would help to support global demand on a more sustainable basis while rebalancing its regional elements and therefore current accounts. Using the United States as an example, the paper also provides estimates of the long-term damage from protracted excessive fiscal deficits, and of the benefits from significant fiscal consolidation.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 6 (2010)
Issue (Month): 1 (March)
Pages: 215-252

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Handle: RePEc:ijc:ijcjou:y:2010:q:1:a:11
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  1. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  2. Michael Kumhof & Dirk Muir & Carlos de Resende & Jan in ‘t Veld & René Lalonde & Davide Furceri & Annabelle Mourougane & John Roberts & Stephen Snudden & Mathias Trabandt & Günter Coenen & Susanna, 2010. "Effects of Fiscal Stimulus in Structural Models," IMF Working Papers 10/73, International Monetary Fund.
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  4. Antonio Spilimbergo & Steven A. Symansky & Carlo Cottarelli & Olivier J. Blanchard, 2009. "Fiscal Policy for the Crisis," IMF Staff Position Notes 2008/01, International Monetary Fund.
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  5. Peter N. Ireland, 1999. "Sticky-Price Models of the Business Cycle: Specification and Stability," Boston College Working Papers in Economics 426, Boston College Department of Economics.
  6. Douglas Laxton & Michael Kumhof, 2007. "A Party without a Hangover? On the Effects of U.S. Government Deficits," 2007 Meeting Papers 676, Society for Economic Dynamics.
  7. Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 858-885, 06.
  8. Douglas Laxton & Susanna Mursula & Michael Kumhof & Dirk Muir, 2010. "The Global Integrated Monetary and Fiscal Model (GIMF) – Theoretical Structure," IMF Working Papers 10/34, International Monetary Fund.
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  12. R. Glenn Hubbard & Eric M. Engen, 2004. "Federal Government Debt and Interest Rates," Working Papers 50018, American Enterprise Institute.
  13. Laxton, Douglas & Pesenti, Paolo, 2003. "Monetary rules for small, open, emerging economies," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1109-1146, July.
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