Map the Macroeconomic interdependencies and spillover effects of policy changes in the large economy

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Map the Macroeconomic interdependencies and spillover effects of policy changes in the large economy

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Question:
You are graduate employee at an International economics think tank called the “Melba” institute and you have been asked to provide some comparative research relating to the findings presented in the article above.
 
Specifically, you have been asked to compare the impact of Covid on the Macroeconomy on both a large economy and a smaller developing economy (this country is not limited to those listed in the article but would need to be a smaller economy that trades with one of the large economies such as the US or China).
 
You are also asked to examine the macroeconomic interdependencies between the large, developed economy and their smaller trading partner. From your findings what can you deduce about inequality in economic recovery as we move to the second part of 2021
 
 
Concepts listed below can be used for comparison,
 
Current economic context of both countries: What has been GDP growth / unemployment / inflation in recent quarters? What are the major policy concerns for both economies.
Balance of payments
What does the balance of payments indicate about the economies net wealth – what have been recent changes or trends in the balance of payments in the respective economies and what are the key drivers of that change.
What does this imply about the countries approach to trading consumption across time – historically have they been net lenders / net borrowers
Has COVID resulted in any major changes in Balance of Trade / the CA / the financial account – (magnitude of change in both economies)
What can you deduce about both economies from the balance of payments data
Exchange Rate determination – identify and contextualise what drives the value of the country’s currency
Have there been recent changes in the value of the domestic currency and what might be driving this – link to the theories of exchange rate determination eg inflation, interest rates etc …Big Mac index PPP
Identify any major shifts in fiscal or monetary policy – how might this impact on the value of the currency
What is the role of the respective central banks? Is the exchange rate managed? Is there discussions around a Central Bank Digital currency? How might this impact on the exchange rate
Are there concerns around capital flows?
If the exchange rate is flexible how volatile have fluctuations been
How sensitive is the economy to changes in the exchange rate?
 
How might a change in the exchange rate impact of the trade balance.
How might a chance in the RER come about (change in e or relative prices)
Estimate which quadrant of the SWAN diagram your country of choice may be operating in?
What might that predict about the role for policymakers – what should be the policy focus – internal and external balance
IS LM BP model applications
Impact of Expansionary fiscal or monetary policy
Changes in relative interest rates
The effect of Covid – (external shock and the adjustment mechanisms)
Map the Macroeconomic interdependencies and spillover effects of policy changes in the large economy
How exposed are the economies to to external shocks
How exposed are the economies to internal shocks
Is there fear of currency crisis – credibility concerns relating to the domestic currency.

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