Financial crisis, global imbalances and monetary policy rules

This research project aims at analysing the fundamental mechanisms behind the persistent current account imbalances we observe in different countries, and to understand the possible role of economic policy in correcting them. These imbalances rise from various changes of the international economic order. The traditional analysis of trade imbalances implicitly assumes independence between the specialization models of surplus and deficit countries. This, however, does not hold true anymore. Productive structures are interlinked by “global value chains”, and the building of current account surplus and deficit is linked to this international fragmentation of production among different countries. Therefore, the concept itself of comparative advantage asks for a new definition, and current account surplus and deficit do not have the same meaning as in a traditional model of international trade.  The first aim of the project is to work on this new definitions of trade patterns and trade balances, and to understand the implications of trade balances so defined for the macroeconomic stability of countries. Moreover, persistent trade imbalances give rise to large international capital flows between countries and the topic of international financial flows and financial markets integration is directly linked with the above-mentioned changes. The gap between the natural and the real effective interest rate has played a crucial role in causing global financial imbalances and in increasing their persistence, but even in spurring asset prices’ bubbles and financial fragility mechanisms which led to the crisis. Closing this gap would go in the direction of improving current account imbalances and avoid new financial crises. The second aim of the project is normative rather than positive, and wants to analyse the role of coordinated monetary policy in addressing these issues.