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Pessimism Shocks in a Model of Global Macroeconomic Interdependence

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  • Rod Tyers

    (Business School, University of Western Australia)

Abstract

Insights into the four-region strategic behaviour that drives global economic performance can be derived from applications of the elemental multi-region, macroeconomic simulation model introduced in this paper. It has a global general equilibrium structure that embodies bilateral linkages between represented regions via both trade and investment. Its behaviour is illustrated with an application to strategic monetary policy during the post-GFC period, which has been characterised by pessimistic expectations over prices, disposable income levels and capital returns in the US, the EU and Japan. The retention of full employment in the pessimistic regions is shown to require very considerable monetary expansions and these tend to flood the other regions with liquidity, temporarily raising their terms of trade, real consumption and investment while appreciating their real exchange rates. The results further suggest elements of coordination game structure amongst the big four economies in which equilibria are characterised by collective monetary responses, at least when subjected to pessimism shocks.

Suggested Citation

  • Rod Tyers, 2014. "Pessimism Shocks in a Model of Global Macroeconomic Interdependence," Economics Discussion / Working Papers 14-28, The University of Western Australia, Department of Economics.
  • Handle: RePEc:uwa:wpaper:14-28
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    References listed on IDEAS

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    1. Warwick J. McKibbin & Andrew B. Stoeckel, 2012. "Global Fiscal Consolidation," Asian Economic Papers, MIT Press, vol. 11(1), pages 124-146, Winter/Sp.
    2. Horioka, Charles Yuji & Terada-Hagiwara, Akiko, 2012. "The determinants and long-term projections of saving rates in Developing Asia," Japan and the World Economy, Elsevier, vol. 24(2), pages 128-137.
    3. Choi, Horag & Mark, Nelson C. & Sul, Donggyu, 2008. "Endogenous discounting, the world saving glut and the U.S. current account," Journal of International Economics, Elsevier, vol. 75(1), pages 30-53, May.
    4. Arora, Vipin & Tyers, Rod, 2012. "Asset arbitrage and the price of oil," Economic Modelling, Elsevier, vol. 29(2), pages 142-150.
    5. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    6. Rod Tyers & Ying Zhang & Tsun Se Cheong, 2013. "China’s Saving and Global Economic Performance," Economics Discussion / Working Papers 13-20, The University of Western Australia, Department of Economics.
    7. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2007. "Direct Investment, Rising Real Wages and the Absorption of Excess Labor in the Periphery," NBER Chapters,in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 103-132 National Bureau of Economic Research, Inc.
    8. Vipin Arora & Rod Tyers & Ying Zhang, 2014. "Reconstructing the Savings Glut: The Global Implications of Asian Excess Saving," Economics Discussion / Working Papers 14-24, The University of Western Australia, Department of Economics.
    9. Rod Tyers, 2012. "Japanese Economic Stagnation: Causes and Global Implications," The Economic Record, The Economic Society of Australia, vol. 88(283), pages 517-536, December.
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