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

  • Juan Pablo Medina
  • Pablo García

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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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. Hamid Faruqee & Douglas Laxton & Dirk Muir & Paolo Pesenti, 2005. "Smooth landing or crash? model based scenarios of global current account rebalancing," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  2. Olivier J. Blanchard & Jordi Gali, 2007. "The Macroeconomic Effects of Oil Shocks: Why are the 2000s So Different from the 1970s?," NBER Working Papers 13368, National Bureau of Economic Research, Inc.
  3. 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.
  4. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Closing Small Open Economy Models," NBER Working Papers 9270, National Bureau of Economic Research, Inc.
  5. Schmitt-Grohé, Stephanie & Uribe, Martín, 2009. "What’s News in Business Cycles," CEPR Discussion Papers 7201, C.E.P.R. Discussion Papers.
  6. Nir Jaimovich & Sergio Rebelo, 2007. "News and Business Cycles in Open Economies," Discussion Papers 07-016, Stanford Institute for Economic Policy Research.
  7. Manuel Marfán & Juan Pablo Medina & Claudio Soto, 2008. "Overoptimism, Boom-Bust Cycles, And Monetary Policy In Small Open Economies," Working Papers Central Bank of Chile 510, Central Bank of Chile.
  8. 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.
  9. Beaudry, Paul & Portier, Franck, 2004. "When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings?," CEPR Discussion Papers 4628, C.E.P.R. Discussion Papers.
  10. Selim Elekdag & Ren� Lalonde & Douglas Laxton & Dirk Muir & Paolo Pesenti, 2008. "Oil Price Movements and the Global Economy: A Model-Based Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 55(2), pages 297-311, June.
  11. Beaudry, Paul & Portier, Franck, 2001. "An Exploration into Pigou's Theory of Cycles," CEPR Discussion Papers 2996, C.E.P.R. Discussion Papers.
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