"The paper assesses the macroeconomic impact of deglobalisation scenarios using an estimated three-region global dynamic general equilibrium framework, considering the euro area, the US, and the rest of the world.
The paper focusses on two structural deglobalisation trend scenarios: first, exogenous disruptions to inter-regional trade, and second, greater inward orientation that is reflected in a higher home bias.
The simulations reveal that the trade compression caused by deglobalisation significantly reduces economic activity globally and in the individual blocs. Transition dynamics are typically stagflationary and are often characterised by substantial exchange rate fluctuations.
Inward orientation is generally costly when occurring universally. However, if the preference shift entails efficiency costs, in terms of stifled competition or more rigid labour markets, cost are even higher.
The paper show that in a less globalised steady state, external shocks would produce less volatility for the euro area economy in terms of GDP and inflation, but there is also less external attenuation of domestic shocks.
One implication is that certain structural trends observed in recent decades, such as the ‘globalisation of inflation', may weaken."

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