The Effects of the Changing Policy Environment on the Global Economy

A Small-Scale Model Approach

by Ku Shin


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This Note analyzes the effects of the "changing policy environment" — the peace dividend, investment stimulation policy, political environment change, and economic cooperation — on the global economy. Its goals are to (1) determine how shifts in the changing policies in the U.S. and Japan contribute to continued growth and reduced external imbalances in both countries and the rest of the world, and (2) suggest strategies for a multicountry simulation model of the world economy. The first essay develops a multicountry simulation model of the world economy. The second essay describes the economic impact of the peace dividend on the world economy: (1) the macroeconomic consequences of U.S. defense cuts; and (2) the impacts of diverting resources from the military to other government programs (i.e., public capital stock) on the U.S., Japan, and other economies. The third essay analyzes U.S. and Japanese corporate investment behavior and the own-effects and cross country spillovers of investment-oriented tax policy changes in the different regions. The fourth essay examines the implications of a "partisan theory" of macroeconomic policy for U.S.-Japan economic relationships. The final essay provides economic gains from coordinating policies among the industrial economies.

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