Global Finance and Effectiveness of Macro-Policies
Published: June 2020
The Portfolio Theory of Inflation (PTI) incorporates a global perspective on the analysis of macro policy effectiveness. According to the PTI, in open and internationally highly financially integrated economies: The intertemporal budget constraint (IBC) of governments is endogenous to global investment choices: it is more flexible for credible countries and tighter for less credible ones, and the IBC of highly credible countries becomes even more flexible at times of global crisis. Macro-policies are effective in credible economies and less effective (and potentially inflationary) in non-credible economies (with flatter Phillips curves being observed in credible countries and becoming even flatter in times of global crisis). Governments can reap no advantage from redenominating their debt or increasing the share of their debt held by residents and monetary financing of public deficits is effective as an anti-recessionary, short-term stopgap, but it is not sustainable as a policy to sustain full employment in the longer run.