A Framework for Geoeconomics | Hoover Institution

January 10, 2024 Hoover Institution | Stanford University Matteo Maggiori, Moghadam Family Professor of Finance at the Stanford Graduate School of Business, and senior fellow at the Stanford Institute for Economic Policy Research, discussed “A Framework for Geoeconomics,” a paper with Christopher Clayton (Yale School of Management), and Jesse Schreger (Columbia Business School). PARTICIPANTS Matteo Maggiori, John Taylor, Anat Admati, Annelise Anderson, Michael Boskin, Jeremy Bulow, John Cochrane, Randi Dewitty, Doug Diamond, David Fedor, Andy Filardo, Pete Fisher, Jared Franz, Eyck Freymann, Eric Hanushek, Heikki Hietala, Ashil Jhaveri, Kenn Judd, Evan Koenig, Roman Kräussl, Tom Kulisz, David Laidler, Mauricio Larraine, Dennis Lockhart, Robert McCauley, Axel Merk, Alexander Mihalov, Ilian Mihov, Casey Mulligan, David Neumark, Ned Prescott, Valerie Ramey, Ned Prescott, Joshua Rauh, Gary Roughead, Flavio Rovida, Paola Sapienza, Jesse Schreger, Lawrence Schembri, Tom Stephenson, Jack Tatom, Victor Valcarcel, Mark Wynne ISSUES DISCUSSED Matteo Maggiori, Moghadam Family Professor of Finance at the Stanford Graduate School of Business, and senior fellow at the Stanford Institute for Economic Policy Research, discussed “A Framework for Geoeconomics,” a paper with Christopher Clayton (Yale School of Management), and Jesse Schreger (Columbia Business School). John Taylor, the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution, was the moderator. PAPER SUMMARY Governments use their countries’ economic strength from existing financial and trade relationships to achieve geopolitical and economic goals. We refer to this practice as geoeconomics. We build a framework based on three core ingredients: limited contract enforceability, input-output linkages, and externalities. Geoeconomic power arises from the ability to jointly exercise threats across separate economic activities. A hegemon, like the United States, exerts its power on firms and governments in its economic network by asking these entities to take costly actions that manipulate the world equilibrium in the hegemon’s favor. We characterize the optimal actions and show that they take the form of mark-ups on goods or higher rates on lending, but also import restrictions and tariffs. Input-output amplification makes controlling some sectors more valuable for the hegemon since changes in the allocation of these strategic sectors have a larger influence on the world economy. This formalizes the idea of economic coercion as a combination of strategic pressure and costly actions. We apply the framework to two leading examples: national security externalities and the Belt and Road Initiative. To read the paper click the following link https://globalcapitalallocation.s3.us-east-2.amazonaws.com/CMS_Strategic.pdf To read the slides, click the following link https://www.hoover.org/sites/default/files/2024-01/CMS_Strategic_Slides.pdf