Economic Policy Efficiency and Recovery in an Open Economy

We look at how the increased trade openness and correspondingly higher marginal propensity to import has resulted in weaker Keynesian multipliers, hence explaining the lower efficiency of economic policy in the context of economic openness. Using an empirical stock-flow consistent model for the French economy (SFC FR), we find that the fiscal multiplier is 1.3 in 1981 while it is only 0.8 in 2023. We then look at the macroeconomic impacts of the measures via a series of relevant shocks on public investment and confirm that the 'globalization effect' plays a non-negligible role in explaining the weakening of macroeconomic policy efficiency. Last, we look at the implications of climate policy as detailed in the Pisani-Ferry and Mahfouz (2023) report to the French Prime Minister.