The Devils: From Real Life to Movie Fiction, and Economic Theory and Practice

Biagio Bossone

Published: March 2023

In a world of highly financially integrated economies, economic theory should differentiate between the role of local agents and that of global financial investors and place the latter at the centre of macroeconomic modelling. The portfolio choices of global financial investors influence the effectiveness of macroeconomic policies: the greater the credibility of a national economy (as perceived by global financial investors), the larger its space available for running effective expansionary policies. Conversely, when investors consider an economy not to be credible, they act in ways that narrow its policy space, and the effects of expansionary policies dissipate into currency depreciation and higher inflation, with little or no impact on real output. Economies should keep their public debt low, limit it to financing investments that repay themselves and/or to bringing the economy out of recessions. In this second case, they should commit to reducing the debt during recoveries.