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Domestic Investment And External Imbalances In East Asia

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  • Jong-Wha Lee

    ()

  • Warwick J. McKibbin

    ()

Abstract

Since the 1997-98 financial crisis, many East Asian economies have experienced permanent declines of domestic investment and output growth, mainly resulting from the increase in financial risk and decrease in the return on investment. The investment decline in East Asia, outside of China, combined with the falling in public and private savings in the United States, has contributed to recent surges in global current account imbalances. The reduction of global current account imbalances requires adjustment policies to raise domestic investment in East Asia, such as expansion of public infrastructure investment and an increase in R&D and human capital investment. Continuous structural reforms in the corporate and financial sectors are also required to lower financial risk and improve investment efficiency. Simulations with a global general equilibrium model support the positive role of the investment increase or strong productivity related growth in reducing current account surpluses in East Asia. Nevertheless, a discal adjustment in the United States turns out to be more effective in reducing the US current account deficit and thereby correcting global imbalance.

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File URL: http://cbe.anu.edu.au/research/papers/camawpapers/Papers/2007/Lee_McKibbin_42007.pdf
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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2007-04.

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Length: 44 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:een:camaaa:2007-04

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References

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  1. Obstfeld, Maurice & Rogoff, Kenneth, 2005. "The Unsustainable US Current Account Position Revisited," CEPR Discussion Papers 5416, C.E.P.R. Discussion Papers.
  2. Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2005. "Savings Gluts and Interest Rates: The Missing Link to Europe," NBER Working Papers 11520, National Bureau of Economic Research, Inc.
  3. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
  4. Barry EICHENGREEN & Hui TONG, 2006. "How China is Reorganizing the World Economy," Asian Economic Policy Review, Japan Center for Economic Research, vol. 1(1), pages 73-97.
  5. Olivier Blanchard & Francesco Giavazzi & Filipa Sa, 2005. "The U.S. Current Account and the Dollar," NBER Working Papers 11137, National Bureau of Economic Research, Inc.
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Cited by:
  1. Sabine Herrmann & Adalbert Winkler, 2009. "Real convergence, financial markets, and the current account - Emerging Europe versus emerging Asia," European Economy - Economic Papers 362, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  2. Joonkyung Ha & Jong-Wha Lee & Lea Sumulong, 2010. "Rebalancing Growth in the Republic of Korea," Macroeconomics Working Papers 22753, East Asian Bureau of Economic Research.
  3. Lane, Philip R. & Schmukler, Sergio, 2006. "The International Financial Integration of China and India," CEPR Discussion Papers 5852, C.E.P.R. Discussion Papers.

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