Macroeconomics and multilateralism: The benefits and influence of global macroeconomic policy cooperation

Abstract

The G20 leaders’ forum was created at a time when the global financial system was on a precipice. Credit markets were freezing. Stock markets were collapsing. Rolling failures across financial institutions were shattering economic confidence. In their first communique, leaders concluded that a root cause of the crisis was insufficient macroeconomic cooperation. It was only through improved cooperation, they warned, that a global depression could be averted.

The thesis explores the impact of macroeconomic policy cooperation within the G20 since 2008 and what it means for the challenges facing the world today. It poses four central questions. Does the G20 influence the domestic macroeconomic policies of its members? What are the economic benefits of macroeconomic cooperation and under what circumstances do they arise? Does the G20 produce political benefits that encourage cooperation? Has the G20 been successful in its attempts at macroeconomic cooperation in the past?

The thesis attempts to answer these questions using data analysis, a new G20-version of a general equilibrium model and the results from in-depth interviews with 63 leaders, central banks governors, finance ministers and officials from across all G20 countries, including Kevin Rudd, Janet Yellen, Haruhiko Kuroda, Ben Bernanke, Jack Lew, Mark Carney, Phil Lowe and 56 others.

The thesis looks at the six areas that make up the G20’s history on macroeconomic cooperation since 2008 – a chronology of the G20’s first 10 years as a forum for leaders -and their relevance to the challenges facing the world in 2018: the economic and political benefits of coordinating fiscal stimulus (Chapter 3), fixing the inadequacies in the world’s crisis-fighting mechanisms (Chapter 4), helping countries to reduce debt and deficits (Chapter 5), strengthening monetary policy cooperation (Chapter 6), reducing global current account imbalances (Chapter 7) and promoting coordinated structural reform (Chapter 8).

Chapter 9 summarises the findings of the thesis. Fundamentally, the thesis demonstrates the benefits and influence of global macroeconomic policy cooperation and the cost of abandoning it. The thesis shows that the G20 does influence domestic macroeconomic policies, that the benefits from cooperation can be substantial, that the G20 can help politicians undertake difficult reforms and that the G20 has a strong record of success and remains a critical part of global economic governance.

Using the interview results, the thesis builds a new framework on the influence of global forums on domestic policies. It explores how this influence varies depending on the form of cooperation (such as information sharing), the transmission mechanism of influence (such as generating peer pressure) and the variables that determine the strength of that influence (such as a crisis).

Using the general equilibrium modelling results, it explores when there is a case for cooperation and the benefits that can flow from it. The gains to GDP, for example, can be 120 per cent larger if fiscal stimulus is coordinated than if it is not. It shows that coordination can help reduce global current account imbalances, can help countries to reduce debt and deficits, can help prevent currency wars and protectionism and, by coordinating macroeconomic resources through international crisis-response institutions, can prevent crises occurring and respond faster when they do.

Finally, the thesis uses the results from each chapter to review the overall success of the G20 on macroeconomic cooperation, including where it has succeeded, where it has fallen short and what factors influence its success. It shows that the G20 has had a good track record in achieving its goals and that criticisms of the G20 often overlook its shift from crisis response to focusing on more difficult structural and institutional issues. The thesis concludes by presenting a forward-looking agenda for the G20 to improve macroeconomic cooperation in the future, particularly in countering the current backlash against globalisation and multilateral cooperation while addressing some of its root causes.