A Simple Model to Study Global Macroeconomic Interdependence

Insights into the international implications of China’s entry to the large economy club and the four-region strategic behaviour that results can be derived from applications of the elemental multi-region, macroeconomic simulation model introduced in this paper. It has a global general equilibrium structure that embodies bilateral linkages between represented regions via both trade and investment. Its behaviour is illustrated with an application to monetary policy following a period of deflationary expectations. Unilateral expansions are shown clearly to have negative real implications for the other large economies whose central banks are forced to respond in kind.