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Transpacific Imbalances and Macroeconomic Codependency

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  • Willem Thorbecke

    (Asian Development Bank Institute (ADBI))

Abstract

Current account deficits in the United States (US) and current account surpluses in East Asia are an enduring part of the global economic landscape. They are supported by low saving in the US and by reserve accumulation in Asia. This paper argues that this strategy is causing macroeconomic problems for the People’s Republic of China (PRC). Inflation is rising, and interest rates are set too low because the yuan is closely linked to the US dollar. Low interest rates have fueled overinvestment in physical capital and rising real estate prices. They also cause savers to earn negative returns on their bank deposits. Greater exchange rate flexibility would allow more decoupling between the PRC’s interest rates and US interest rates, helping the People’s Bank of China to implement monetary policy that is appropriate for the PRC. Since exchange rate appreciations would be contractionary for the PRC, they should be combined with domestic absorption-increasing policies such as spending on education, health care, and urban transportation. Interest rates and exchange rates that are more determined by market forces would also help the PRC to move away from an overly capital-intensive growth path to one that is more beneficial for smaller firms and ordinary workers.

Suggested Citation

  • Willem Thorbecke, 2011. "Transpacific Imbalances and Macroeconomic Codependency," Governance Working Papers 23237, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:govern:23237
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    References listed on IDEAS

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    1. Willem Thorbecke, 2011. "How Elastic is East Asian Demand for Consumption Goods?," Review of International Economics, Wiley Blackwell, vol. 19(5), pages 950-962, November.
    2. Thorbecke, Willem & Lamberte, Mario & Komoto, Ginalyn, 2010. "Promoting Learning and Industrial Upgrading in ASEAN Countries," ADBI Working Papers 250, Asian Development Bank Institute.
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    6. Ma, Guonan & McCauley, Robert N., 2011. "The evolving renminbi regime and implications for Asian currency stability," Journal of the Japanese and International Economies, Elsevier, vol. 25(1), pages 23-38, March.
    7. Michel Aglietta & Claire Labonne & Françoise Lemoine, 2011. "Exchange Rate Policy and Regional Integration in Asia," La Lettre du CEPII, CEPII research center, issue 307.
    8. THORBECKE, Willem, 2009. "Can East Asia be an Engine of Growth for the World Economy?," Discussion papers 09006, Research Institute of Economy, Trade and Industry (RIETI).
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    11. repec:cii:cepill:2010-307 is not listed on IDEAS
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    More about this item

    Keywords

    current account imbalances; East Asia; the US; macroeconomic problems; monetary policy; Fiscal Policy;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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