Working Paper: CEPR ID: DP92
Authors: Willem H. Buiter
Abstract: The paper uses a small analytical model of two regions, the United States and the Rest of the Industrial World, to analyze three topical issues concerning international economic interdependence and macroeconomic policy coordination. They are: (1) What should be the monetary and/or fiscal response in the Rest of the Industrial World to a tightening of United States fiscal policy and what should be the United States monetary response? (2) What should be the monetary and/or fiscal response in the United States and in the Rest of the Industrial World to a 'collapse of the United States dollar?' The paper highlights the importance of determining the causes of such a 'hard landing' for the United States dollar, as the appropriate policy responses are very sensitive to this; (3) What should be the macroeconomic policy response in the Industrial World to a disappointing real growth performance? Again the correct identification of the reason(s) for the disappointment is shown to be crucial. The final section discusses and qualifies the activist policy conclusions derived from the formal analysis.
Keywords: interdependence; macroeconomic policy design; exchange rates; US dollar; economic growth
JEL Codes: 133; 321; 431
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US fiscal contraction (E62) | world economic activity (F69) |
| US fiscal contraction (E62) | domestic output (E23) |
| collapse of the US dollar (F31) | type of policy response (E65) |
| disappointing real growth performance (O49) | fiscal and/or monetary stimuli (E63) |