Globalization, Gating, and Risk Finance

4Macroeconomics, Foreign Exchange, and Global Finance

Motivation

This chapter reviews fundamental macroeconomic and international economic models from a global perspective. We discuss a number of linkages between geopolitics, risk finance, and macroeconomics. Two types of models are presented: (1) traditional closed‐economy models based upon sovereign measurements of their own economy and (2) open‐economy models, as originally extended by Keynes, emphasizing consumption and the interaction between domestic factors (including both private and public sectors), as well as interactions with foreign economies. These were originally extended by Mundell and Fleming. An economy is defined both by its monetary and by its real sectors, providing a macroeconomic relationship between real goods, money markets, and international transactions. We discuss the importance of balance of payments (BOP) in global finance along with its underlying principles and components, and analyze recent trends in macroeconomic policies and exchange rate movements that shape economic globalization. The sustainability of external debt and trends in foreign direct investment (FDI) are highlighted as well.

4.1 Introduction

Macroeconomics is an essential part of political governance. Its economic rationality and its application to sovereign policy are due, essentially, to John Maynard Keynes. Keynes defined an economy’s aggregates in terms of three sectors:

• the goods market, consisting of the real economy and ...