A New Era of International Economic Policy

Abstract

We distinguish between a “Friedman world” and a “Keynes world,” the latter being characterized by the zero lower bound problem. With the natural rate of interest tending to fall over time, the Keynes world is becoming the norm. In the Keynes world, voters defend their interests as producers more than their interests as consumers. This strengthens protectionism at the ballot box. We are less and less able to rely on the USA to serve as the engine of the global economy via its high current account deficits. In addition to the WTO rules, an international fiscal order is needed to rescuefree trade: 1. At low real interest rates, countries with current account surpluses undertake to eliminate them by increasing government net borrowing. 2. At high real interest rates, countries with current account deficits undertake to eliminate them by cutting fiscal expenditure or raising taxes.