Financial Deglobalization, Decline in Dollar Hegemony and the New World Economic Order: Spillover Effects of Prolonged Expansionary Policy

Abstract

Expansionary Policy (both Fiscal and Monetary) has been the preferred fallback option for countries dealing with a crisis attempting to stimulate the aggregate demand and revive the economy. Since the turn of the century, both the Global Financial Crisis of 2008 and Covid-19 pandemic were moderated through a combination of extensive monetary and fiscal intervention. The risks of expansionary policy on inflation, economic growth, income redistribution and asset volatility within a geography are extensively researched. This research supplements the existing research by analyzing the spillover effects of largely uncoordinated expansionary policy response with countries unilaterally implementing policy decisions. This thesis focuses on two global phenomena: (1) financial deglobalization and (2) change in world economic order evaluated through dollar hegemony using a multivariate regression analysis complemented by a recent development in international trade with an intent to mitigate its vulnerability to contagion and geo-political risk. The key findings of this thesis are that prolonged exposure to expansionary monetary policy has a negative impact on the stability of the banking sector and that uncoordinated monetary policy combined with a deacceleration the financial globalization has a detrimental impact on US dollar hegemony. However, the US Dollar continues to hold its hegemonic status (albeit declining) in the near future for a variety of reasons including lack of alternatives. Keywords: Deglobalization, Dollar Hegemony, Expansionary Monetary Policy