Globalization or Deglobalization: A Policy Perspective

    Project: Research project

    Project Details


    In the last few years, the world has witnessed a slowdown in globalization and even a reverse trend into deglobalization. The question is: does the seeming retrogression carry its own economic rationale, and from the policy intervention perspective how to respond to deglobalization.

    This project is a quantitative one that takes on a business cycle point of view and quests after the impact of deglobalization on domestic macroeconomic fluctuations. Con- sider an international economy where the macroeconomic fluctuations are driven by two kinds of shocks: country-level shocks and sector-level shocks. Meanwhile, sectors in dif- ferent countries are connected through the global production and trade networks, which is important in transmitting shocks and amplifying the fluctuations.

    As a country participates more in the global value chain, the country-level shocks are largely hedged. Nevertheless, at the same time, the trade openness also induces a country to concentrate in a small number of specialized sectors, thus the country becomes more exposed to the sector-level shocks. On the contrary, as a country opts out of the global value chain, the more diversified industry structure reduces exposure to sector-level shocks but increases exposure to domestic country-level shocks. If government aims to stabilize the economy and minimize the GDP volatility, then one conjecture is that the sector-level shocks are becoming more volatile than the country-level shocks in last decade, leading to the deglobalization trend. Importantly, whether this deglobalization leads to a higher or lower GDP volatility hinges on the policy interventions that governments choose.

    I start with the case where the policy interventions of any kinds are absent. This provides a laissez-faire benchmark. Next, I extend the benchmark model to allow for three different kinds of policy interventions: (1) fiscal policy that involves state-dependent government spending and transfers. This type of policy is at the aggregate level and is most effective at mitigating the exposure to domestic country-level shocks; (2) trade policy such as tariffs on imports and exports. This type of policy is sector-country specific and can be targeted to reduce exposure to sector-level shocks and foreign country-level shocks; (3) industry policy such as subsidy and tax on certain sectors. This policy can alter relative sizes of sectors and adjust exposure to sector-level shocks. When transiting from globalization to deglobalization, whether a country’s GDP volatility increases or decreases will depend on which type of policy is employed and depend on how intensive these policies are implemented.
    Effective start/end date1/01/2231/10/23


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