Timothy Meyer

Hegemonic powers use economic tools to influence the geopolitical alignment of third countries. We develop a bargaining model in which two competing hegemons use direct payments (carrots) and economic threats (sticks) to influence third countries. Guided by the model, we measure carrots and sticks using historical data from the Cold War. We use our measures to empirically estimate the effects of carrots and sticks on geopolitical alignment. These tools create political alignment, but are expensive. We combine the model with the empirical estimates to compute the geopolitical return on foreign aid and evaluate the consequences of the USAID shutdown for the modern U.S–China competition.

U.S. equity outperformance and sustained dollar appreciation have led to large valuation gains for the rest of the world on the U.S. external position. I construct their global distribution, carefully accounting for the role of tax havens. Valuation gains are concentrated and large in developed countries, while developing countries have been mostly bypassed. To assess the welfare implications of these capital gains, I adopt a sufficient statistics approach. In contrast to the large wealth changes, most countries so far did not benefit much in welfare terms. This is because they did not rebalance their portfolios and realize their gains. In contrast, direct welfare effects from the dollar appreciation on import and export prices are an order of magnitude larger.