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

Abstract

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.