Chapter II. the World Economy

Abstract

The chapter contains detailed forecasts to the end of 1989 and medium-term projections to 1992. These are followed by two special sections. The first presents three forecast variants using simulations of our world model GEM. In variant A the G7 prevent the steady decline in the dollar assumed in our central forecast. Variant B examines the effects of a global rise in interest rates, while variant C looks at a sharp fall in the dollar precipitated by lower US interest rates. The second section focuses on the impact of international policy co-operation by describing some recent research using GEM. Although this highlights the potential benefits of co-operation, we also suggest that the recent Louvre accord was seriously flawed because it adopted exchange-rate targets that were incompatible with individual countries'own domestic demand objectives.