Keynesian Policy Space in "Globalized" Economies

Biagio Bossone

No PKWP2405, Working Papers from Post Keynesian Economics Society (PKES)

Abstract: This article shows that in highly internationally financially integrated ("globalized") economies, policymakers' ability to implement effective expansionary macroeconomic policies, referred to in the article as "Keynesian policy space," is influenced by the portfolio decisions of a specific group of investors known as "Global investors." This conclusion arises from a two-country, open-economy model in which Global investors allocate capital internationally based primarily on their perception of the policy credibility of the countries where they invest their managed wealth. In countries that Global investors deem highly credible, expansionary macroeconomic policies prove effective in terms of stimulating output and resource employment. Conversely, in countries perceived as having weak credibility, the portfolio decisions of these investors may undermine the effectiveness of such policies. Consequently, the anticipated real effects of these policies may dissipate into domestic currency depreciation and higher inflation. Following the derivation and evaluation of this conclusion, the article explores various options for countries to establish and maintain Keynesian policy space.

Keywords: credibility; exchange rate; financial integration; global investor; inflation; intertemporal budget constraint; macro-policies (search for similar items in EconPapers)
JEL-codes: E31 E40 E50 E62 F31 G15 H30 (search for similar items in EconPapers)
Pages: 50
Date: 2024-04
New Economics Papers: this item is included in nep-ifn, nep-mac, nep-opm and nep-pke
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