There is no such thing as "global aggregate demand" By Scott Sumner

Aggregate demand is fundamentally a monetary concept, linked to each country’s monetary unit. Only in a few cases, such as the eurozone, does it make sense to talk about aggregate demand as a regional concept. Indeed in the eurozone, aggregate demand is only useful as a regional aggregate; it makes little sense to talk about “AD in Germany” or “AD in Greece.”

Many economists are confused about AD, and treat it as a real concept. Thus Keynesians often point to slow real GDP growth in places like Britain as evidence that “demand” is inadequate. But that’s reasoning from a quantity change. If the aggregate supply curve shifts to the left, then real GDP will fall. But obviously that’s not a decline in “aggregate demand.”

Here’s a Reuters article discussing the views of Raghuram Rajan:

“The current non-system in international monetary policy is, in my view, a source of substantial risk, both to sustainable growth as well as to the financial sector,” Rajan told an audience of economists and investors in New York. “I fear that in a world with weak aggregate demand, we may be engaged in a risky competition for a greater share of it,” he added. “We are thereby also creating financial sector risks for when unconventional policies end.” . . . Rajan, a former IMF chief economist, said that since “the spectre of deflation haunts central bankers,” it is no wonder that developed countries do not want to settle for low growth “even if that is indeed their economy’s potential.” Still they should not ignore their responsibilities to developing economies, he said, adding the IMF should be the arbiter of whether accommodative policies are “in- or out-of-bounds.”

Rajan seems to imply there is such a thing as global AD, that it’s a pie that countries can take a larger piece of by engaging in beggar-thy-neighbor policies, such as monetary stimulus. This is almost entirely wrong. There is no such thing as global AD, and monetary stimulus either enlarges global output (it’s not a zero sum game) or has no effect, and merely results in domestic inflation, with no change in the real exchange rate. Either way, monetary expansion in country X is never going to steal jobs from country Y. And when those economies are artificially depressed by a combination of low NGDP and sticky wages, then the rest of the world benefits from monetary stimulus that boosts output closer to the natural rate. It’s a win-win policy, not a beggar-thy-neighbor policy.

But once again, I can’t emphasize enough that there is no such thing as global AD. If you read that phrase in the linked article and thought it meant something, then you need to go back to your old college EC102 textbook. Do you see that price level variable on the vertical axis of the AS/AD diagram? There’s also no global price level, or global inflation rate. There is no such thing as global aggregate demand.