Peter Petri and Wendy Dobson
Asia is gradually changing the landscape of regional and global economic cooperation. Institutional reforms are underway to respond to its growing economic clout and pluralism. External expectations of Asian participation in collective goals are growing. But Asians have been major beneficiaries of the global economic system, and remain more comfortable with incremental change than with leading new initiatives or with enforcing global norms and rules. This reticence combined with reluctance of existing players to revamp governance structures in global institutions means that the existing order will continue to function. Economic cooperation in many areas, including new areas such as climate change, is therefore likely to be sluggish as countries face tradeoffs between their domestic priorities and the collective interest.
Eiji Ogawa and Chikafumi Nakamura
This chapter examines the behavior of the Asia Pacific region’s currencies through the lens of the global financial crisis of 2008-2009 and the global imbalances that have been a possible contributor to that crisis. It discusses the “savings glut” hypothesis and identifies the possible causes of global imbalances which include the behavior of asset prices and the U.S. fiscal deficits. It also considers the possibility of an Asian Currency Unit (ACU) or Asian Monetary Unit (AMU).
This chapter analyzes and draws lessons from the Asian financial crisis of 1997-1998. It discusses the underlying factors that led to the crises, the differences from the previous balance of payments crises, and the policies that were adopted to control the crises. These policy responses included changes in exchange rate policies, financial sector reforms and, in several cases, external support from multilateral agencies. This article highlights the benefits of adequate foreign exchange reserves and the dangers of overleveraging.
Reuven Glick and Michael Hutchison
This chapter examines the financial linkages between China and the rest of East Asia in the context of China’s possible financial liberalization and internationalization of its currency. It provides new empirical evidence on short-run and long-run linkages between China and East Asia for exchange rates, interest rates, and equity markets and discusses the divergence of asset return behavior between China and several Asian Pacific economies. It also considers the policy challenges faced by China in deciding how to sequence capital-account opening and currency internationalization with other policies such as financial market development.
Manmohan Singh Kumar, Nirvikar Singh, and Jaejoon Woo
The chapter documents the evolution of fiscal balances, public debt, and revenue and expenditure ratios as well as GDP growth, and inflation in the Pacific Rim economies over the past two decades. It also provides a brief summary of the some of the factors that underlie these developments, noting in particular budgetary policies, including tax and expenditure policies, and the role of budgetary institutions. In addition, the chapter discusses the relationship between growth, interest rates, fiscal positions, and debt sustainability The chapter highlights the heterogeneity of fiscal experiences of countries in the region and the varied challenges that they face over the medium and long run to ensure sustainable public finances.
Pablo García-Silva and Manuel Marfán
The performance of emerging economies relative to developed ones has been an important issue in the unfolding of the 2008–9 financial turmoil and the Great Recession. In the case of Latin America, in sharp contrast to periods of turbulence in previous decades, this chapter argues that financial and price stability has been preserved, with impacts on growth that have been less dramatic than in the early 1980s, while monetary policy has reacted more flexibly. The chapter discusses a number of aspects that have contributed to this improved performance during the recent crisis, such as initial economic conditions, especially the fiscal and external positions of the economies in the run-up to the crisis; the evolution of monetary/exchange rate regimes, particularly the shift to inflation targeting and flexible exchange-rate regimes; and structural and institutional aspects such as central-bank independence, reduced domestic financial dollarization, and the strength of fiscal institutions.
Yin-Wong Cheung and Hui Miao
The offshore renminbi (RMB) market in Hong Kong is one of China’s recent initiatives to liberalize its financial markets and promote the international use of the RMB. Its development is mainly driven and shaped by China’s policies rather than market forces. This chapter reviews the main developments of the nascent offshore RMB market, its prospects, and its links with China’s effort to internationalize its currency.
Menzie Chinn and Hiro Ito
We examine the issue of global rebalancing with much focus on East Asia, particularly China. For that purpose, we reexamine the determinants of current account balances, applying updated data to the framework based on Chinn and Ito (2007a). Based on our estimates, changes in the budget balance appear to be an important factor affecting current account balances for advanced current account deficit countries such as the United States and the United Kingdom. We also find evidence for the effect of the “saving glut variables” on current account balances for emerging market countries. However, we also identify components of current account balances that cannot be explained by cross-country variation, but can be explained only by country-specific factors, suggesting that country-specific analysis is necessary to foresee the prospects of global rebalancing. For that purpose, we review the institutional aspects of China’s development that have led to high saving in the country, particularly the factors that have contributed to high saving rates in all three sectors: public, corporate, and household. We find that all these factors are the outcome of the country’s growth strategies and are intricately intertwined with each other. These findings suggest that unless countries implement substantial policy changes, the global imbalances are unlikely to disappear.
Maria Socorro Gochoco-Bautista and Noli R. Sotocinal
This chapter examines capital account liberalization in the Asia Pacific. It discusses arguments for and against openness of the capital account and describes the relevant experience of some countries. It describes the imbalances in the global financial system and discusses various kinds of capital control measures that have been used in recent years. It suggests that a return to financial autarky is not feasible for the region and highlights the importance of domestic financial development for developing economies.
Joshua Aizenman and Hiro Ito
We examine the development of open macroeconomic policy choices among developing economies from the perspective of the powerful “trilemma” hypothesis. Using the “trilemma indexes” (Aizenman, Chinn, and Ito, 2010) that measure the extent of achievement in monetary independence, exchange rate stability, and financial openness, we observe that the three dimensions of the trilemma configurations are converging toward a “middle ground” among emerging market economies with managed exchange rate flexibility, underpinned by sizable holdings of international reserves and intermediate levels of monetary independence and financial integration. We also find emerging market economies with more converged policy choices have tended to experience smaller output volatility in the last two decades. Emerging markets with low levels of international reserves holding could experience higher levels of output volatility when they choose a policy combination with a greater degree of policy divergence, while it does not apply to economies with high levels of international reserves holding. These results indicate that holding a high volume of international reserves may give room to emerging market economies to choose a policy combination from a wider spectrum of policy combinations.