No. 1475 - FraNK: fragmentation in the NK model
This paper develops a New-Keynesian model with different countries to analyse the macroeconomic consequences of geoeconomic fragmentation. In the model, the economies are divided into blocs that impose tariffs on imports of goods and commodities from rival jurisdictions and restrictions on cross-border financial flows. The calibration is based on four country blocs: a) the United States; b) the allies of the United States; c) China, Russia and their allies; d) other countries, considered neutral.
With respect to free trade, fragmentation leads to a sharp decline in production and consumption in the China-led bloc and in US allies. The consequences of fragmentation on the United States are milder because they are less exposed to the China-led coalition than their allies, while the effects on neutral countries are negligible. The inflation response is uncertain, as both global supply and demand are declining. The exchange rates most affected by fragmentation are those of the pro-China bloc.
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20 December 2024
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