Working Paper: NBER ID: w17682
Authors: Charles Goodhart
Abstract: The overriding practical problem now is the tension between the global financial and market system and the national political and power structures. The main analytical short-coming lies in the failure to incorporate financial frictions, especially default, into our macro-economic models. Neither a move to a global sovereign authority, nor a reversion towards narrower economic nationalism, seems likely to take place in the near future. Meanwhile, the adjustment to economic imbalances remains asymmetric, with almost all the pressure on deficit countries. Almost by definition surplus countries are "virtuous". But current account surpluses have to be matched by net capital outflows. Such capital flows to weaker deficit countries have often had unattractive returns. A program to give earlier and greater warnings of the risks of investing in deficit countries could lead to earlier policy reaction, and reduce the risk of crisis.
Keywords: No keywords provided
JEL Codes: E32; E42; E44; F02; F21; F33; F34; F4; F42; F51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global financial oversight fails to address discord between national sovereignty and global economic interdependence (F65) | systemic risks (F65) |
| lack of enforcement mechanisms for international banking regulations (F65) | weaker capital buffers for banks (F65) |
| absence of a global authority (F00) | national financial stability (G28) |
| pressures on deficit countries to adjust economic policies (F32) | economic outcomes of deficit countries (H62) |
| lack of reciprocal obligations on surplus countries (F41) | pressures on deficit countries to adjust economic policies (F32) |
| current account surpluses (F32) | economic vulnerabilities of deficit countries (F34) |