155 posts on "International Economics"
May 20, 2025
Why Does the U.S. Always Run a Trade Deficit?
The obvious answer to the question of why the United States runs a trade deficit is that its export sales have not kept up with its demand for imports. A less obvious answer is that the imbalance reflects a macroeconomic phenomenon. Using national accounting, one can show deficits are also due to a persistent shortfall in domestic saving that requires funds from abroad to finance domestic investment spending. Reducing the trade imbalance therefore requires both more exports relative to imports and a narrowing of the gap between saving and investment spending.
April 24, 2025
Gauging the Strength of China’s Economy in Uncertain Times
Amid increasing pressure on the Chinese economy from China’s trade conflict with the U.S., assessing the strength of the Chinese economy will be an important watch point. In this post, we provide an update on China’s recent economic performance and policy changes. While China is likely to counter growth headwinds from the escalating trade tensions with additional policy stimulus, the country’s complex fiscal dynamics and the varying interpretations of the strength of its economic growth made judgments of the efficacy of China’s policy response challenging even in a more predictable environment. In this respect, we argue that aggregate credit is a simple and effective measure to gauge policy stimulus in China. At present, China’s “credit impulse”—the change in the flow of new aggregate credit to the economy relative to GDP—appears likely sufficient to allow it to muddle through with steady but not strong growth over the next year despite the intensifying trade conflict.
April 14, 2025
Will Peak Demand Roil Global Oil Markets?
“Peak oil”—the notion that the depletion of accessible petroleum deposits would soon lead to declining global oil output and an upward trend in prices—was widely debated in the late 1990s and early 2000s. Proponents of the peak supply thesis turned out to be wrong, given the introduction of fracking and other new extraction methods. Now the notion of peak oil is back, but in reverse form, with global demand set to flatten and then fade amid growing use of EVs and other low-carbon technologies. The arrival of “peak demand” would turn global oil markets into a zero-sum game: Supply growth in one region or field would simply push down prices, driving out higher-cost producers elsewhere. A key question is how U.S. producers would adapt to the new market environment.
Posted at 7:00 am in International Economics | Permalink
April 7, 2025
Monetary Policy Spillovers and the Role of the Dollar
In the literature on monetary policy spillovers considered in the two previous posts, countries that would otherwise operate independently are connected to one another through bilateral trade relationships, and it is assumed that there are no frictions in currency, financial, and asset markets. But what if we introduce a number of real-world complexities, such as a dominant global currency and tight linkages across international capital markets? Given these additional factors, is it still possible to draw generalized conclusions about international policy spillovers—and can we still think of them as a fundamentally bilateral phenomenon? In our third and final post, we explore these questions by focusing on two key elements in the determination of international policy spillovers: the U.S. dollar and the Global Financial Cycle.
Posted at 7:02 am in International Economics | Permalink
How Household Saving Affects Monetary Policy Spillovers
As covered in the first post in this series, the international transmission of monetary policy shocks features positive output spillovers when the so-called expenditure-switching effect is sufficiently large. Departing from textbook analysis, this post zooms in on the implications of differences across market participants with respect to their consumption preferences and ability to insure against income risk. The key message is that these features can, at least theoretically, change the impact of spillovers from positive to negative as well as alter their overall magnitude. These aspects of the international transmission mechanism are especially relevant when addressing spillovers from advanced to emerging economies.
Posted at 7:01 am in International Economics | Permalink
Monetary Policy Spillovers in the Global Economy
Understanding cross-border interdependencies and inspecting the international transmission mechanism of policy shocks is the raison d’être of open-economy macroeconomics as an intellectual discipline. The relevance for the policy debate is pervasive: over and over in the history of the international monetary system national policymakers have pointed at — and voiced concerns about—the effects of policy actions undertaken in foreign countries on the outlook and financial conditions in their own domestic economies. The most recent example involves the spillovers of tighter monetary policies aimed at addressing the inflationary spikes associated with the COVID-19 pandemic. In this three-part series, we provide a non-technical introduction to the multifaceted literature on global spillovers, building in particular on our own research. This post introduces the subject and offers an overview of the classic transmission channels.
Posted at 7:00 am in International Economics | Permalink
February 27, 2025
Supply and Demand Drivers of Global Inflation Trends
Our previous post identified strong global components in the slow-moving and persistent dynamics of headline consumer price index (CPI) inflation in the U.S. and abroad. We labeled these global components as the Global Inflation Trend (GIT), the Core Goods Global Inflation Trend (CG-GIT) and the Food & Energy Global Inflation Trend (FE-GIT). In this post we offer a narrative of the drivers of these global inflation trends in terms of shocks that induce a trade-off for monetary policy, versus those that do not. We show that most of the surge in the persistent component of inflation across countries is accounted for by global supply shocks—that is, shocks that induce a trade-off for central banks between their objectives of output and inflation stabilization. Global demand shocks have become more prevalent since 2022. However, had central banks tried to fully offset the inflationary pressures due to sustained demand, this would have resulted in a much more severe global economic contraction.
Global Trends in U.S. Inflation Dynamics
A key feature of the post-pandemic inflation surge was the strong correlation among inflation rates across sectors in the United States. This phenomenon, however, was not confined to the U.S. economy, as similar inflationary pressures have emerged in other advanced economies. As generalized as the inflation surge was, so was its decline from the mid-2022 peak. This post explores the common features of inflation patterns in the U.S. and abroad using an extension of the Multivariate Core Trend (MCT) Inflation model, our underlying inflation tracker for the U.S. The Global MCT model purges transitory noise from international sectoral inflation data and quantifies the covariation of their persistent components—in the form of global inflation trends—along both country and sectoral dimensions. We find that global trends play a dominant role in determining the slow-moving and persistent dynamics of headline consumer price index (CPI) inflation in the U.S. and abroad, both over the pre-pandemic and post pandemic samples.
December 5, 2024
Do Import Tariffs Protect U.S. Firms?
One key motivation for imposing tariffs on imported goods is to protect U.S. firms from foreign competition. By taxing imports, domestic prices become relatively cheaper, and Americans switch expenditure from foreign goods to domestic goods, thereby expanding the domestic industry. In a recent Liberty Street Economics post, we highlighted that our recent study found large aggregate losses to the U.S. from the U.S.-China trade war. Here, we delve into the cross-sectional patterns in search of segments of the economy that may have benefited from import protection. What we find, instead, is that most firms suffered large valuation losses on tariff-announcement days. We also document that these financial losses translated into future reductions in profits, employment, sales, and labor productivity.
December 4, 2024
Using Stock Returns to Assess the Aggregate Effect of the U.S.‑China Trade War
During 2018-19, the U.S. levied import tariffs of 10 to 50 percent on more than $300 billion of imports from China, and in response China retaliated with high tariffs of its own on U.S. exports. Estimating the aggregate impact of the trade war on the U.S. economy is challenging because tariffs can affect the economy through many different channels. In addition to changing relative prices, tariffs can impact productivity and economic uncertainty. Moreover, these effects can take years to become apparent in the data, and it is difficult to know what the future implications of a tariff are likely to be. In a recent paper, we argue that financial market data can be very useful in this context because market participants have strong incentives to carefully analyze the implications of a tariff announcement on firm profitability through various channels. We show that researchers can use movements in asset prices on days in which tariffs are announced to obtain estimates of market expectations of the present discounted value of firm cash flows, which then can be used to assess the welfare impact of tariffs. These estimates suggest that the trade war between the U.S. and China between 2018 and 2019 had a negative effect on the U.S. economy that is substantially larger than past estimates.
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