More Evidence That Global Policy Making is the Only Path to Job and Income Growth

SOURCE ITEMS FOR YOUR CONSIDERATION

The size and composition of spillovers across countries is one of the many issues that have resurfaced in the wake of the Great Recession. It is now apparent that events in some countries can have profound spillovers elsewhere which are not limited to their immediate neighbors but can ricochet around the globe.

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Although progress is being made, the financial sectors in large macroeconomic models are poorly developed and, at an even more basic level, there are no strong theories as to why financial markets are as closely linked as they appear to be in the data.

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The structure of a typical large macroeconomic model generates low correlations of output, bond yields, and (where modeled) equity prices across countries. This does not correspond to the high correlations actually seen in the data. Imposing these financial market correlations produces estimated output spillovers that are much closer to those seen in the data, but we lack a comprehensive model explaining why these international asset price correlations are so high.

Bayoumi, Tamim ; Vitek, Francis, Macroeconomic Model Spillovers and Their Discontents, Working Paper, International Monetary Fund, January 2013.

COMMENTS

In other words, most economists are holding us back, not leading us forward.

Nations are more economically interconnected that most economists admit.  Really, we live in one world economy, not a world of national economies, and the scope of policy making must match the scope of the economy.  Otherwise, we will keep getting the terrible job and income growth consequences and the associated domestic and geopolitical turmoil we have been getting.