Global growth, international trade patterns and national inflation policies with capital accumulation in a multi‐country economy

Abstract

Purpose

The purpose of this paper is to examine global monetary economic growth with free trade. It develops a multi‐country monetary growth model with capital accumulation to provide some insights into complexity of economic globalization with free trade and financial markets.

Design/methodology/approach

The real aspects of the model is based on the neoclassical growth theory and monetary aspects of the model are based on the money‐in‐utility approach. The behavior of households is based on an alternative approach. The paper shows that the dynamics of the J‐country world economy can be described by 2J‐dimensional differential equations.

Findings

This paper simulates equilibrium and motion of the global economy with three, developed, newly industrializing, and developing countries and Cobb‐Douglas production functions. As the global monetary economic system is unstable, the perfectly competitive world economy may either experience unlimited growth or economic crisis. Because of the choice of the initial conditions and the parameters, the simulation demonstrates a situation of global economic declination. This paper also demonstrates, for instance, that the global economy worsens off as the developed economy reduces its propensity to save or increases its inflation policy.

Social implications

This paper also tries to provide some possible implications of our model for the recent economic crisis. A policy implication of the results is that as global economies with free trade and financial markets are possibly structurally unstable and the global economy may suffer from economic declination, government interventions, and co‐operation among countries are necessary for global sustainable development.

Originality/value

The paper offers insights into the linkage between national monetary policies and global economic growth.

Citation

Zhang, W. (2010), "Global growth, international trade patterns and national inflation policies with capital accumulation in a multi‐country economy", Journal of Financial Economic Policy, Vol. 2 No. 1, pp. 60-79. https://doi.org/10.1108/17576381011055343