Earth economics studies the economy of our planet from the perspective of an autarkic system (a “closed economy”). It ignores the constituent national and regional parts of the planet economy and focuses on the whole. The book respects the heritages of IS/LM (Keynes) and neoclassical growth (Solow) not out of economic respect but because these tools are very useful in understanding the crisis and the policy response to that crisis.
paper describes a paradox of global thrift. Consider a world in which interest
rates are low and monetary policy cannot stabilize the economy because it is
frequently constrained by the zero lower bound. Now imagine that governments
complement monetary policy with prudential financial and fiscal policies,
because they perceive that limiting private and public borrowing during booms
will help stabilize the economy by reducing the risk of financial crises and by
creating space for fiscal interventions during busts. We show that these
policies, while effective from the perspective of individual countries, might
backfire if applied on a global scale. In a financially integrated world, in
fact, prudential policies generate a rise in the global supply of savings, or
equivalently a drop in global aggregate demand. In turn, weaker global
aggregate demand depresses output in countries whose monetary policy is
constrained by the zero lower bound. Due to this effect, the world might
paradoxically experience a fall in output and welfare following the
implementation of well-intended prudential policies.