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High growth and low consumption in East Asia: How to improve welfare while avoiding financial failures

  • Feltenstein, Andrew
  • Rochon, Céline
  • Shamloo, Maral

This paper analyzes certain policies that are typical of a number of rapidly growing East Asian countries in which a fixed exchange rate, combined with a surplus labor market, has made domestic assets relatively inexpensive, generating high rates of FDI as well as domestic capital formation. This "investment hunger" can lead to unanticipated declines in the returns to investment, and resulting financial insolvencies. Private consumption remains low and there are concerns that high savings rates cannot be sustained. We construct a dynamic general equilibrium model and apply it to a stylized Asian economy, loosely based upon China. We calibrate a benchmark equilibrium, and carry out various counterfactual simulations to analyze alternative policies, in particular tax cuts and exchange rate revaluations, as instruments in increasing private consumption while avoiding bank failures.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 91 (2010)
Issue (Month): 1 (January)
Pages: 25-36

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Handle: RePEc:eee:deveco:v:91:y:2010:i:1:p:25-36
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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  1. Andrew Feltenstein, 2000. "Bank Failures and Fiscal Austerity; Policy Presecriptions for a Developing Country," IMF Working Papers 00/90, International Monetary Fund.
  2. Lane, Philip R. & Schmukler, Sergio L., 2007. "The international financial integration of China and India," Policy Research Working Paper Series 4132, The World Bank.
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  17. Fung, K. C. & Iizaka, Hitomi & Parker, Stephen, 2002. "Determinants of U.S. and Japanese Direct Investment in China," Journal of Comparative Economics, Elsevier, vol. 30(3), pages 567-578, September.
  18. Barry Eichengreen & Hui Tong, 2005. "Is China's FDI Coming at the Expense of Other Countries?," NBER Working Papers 11335, National Bureau of Economic Research, Inc.
  19. Andrew Feltenstein & Saleh M. Nsouli, 2003. ""Big Bang" Versus Gradualism in Economic Reforms: An Intertemporal Analysis with an Application to China," IMF Staff Papers, Palgrave Macmillan, vol. 50(3), pages 6.
  20. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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