The Global Macroeconomic Crisis and G20 Macroeconomic Policy Coordination

This paper argues that the global macroeconomy has been highly unstable. The combination of undervalued exchange rates in East Asia and the use by the US of monetary policy to ensure a steady growth led to an outcome in which interest rates fell a great deal. In the presence of a highly leveraged financial system, such a large fall in interest rates created a very large rise in the price of financial assets—in particular houses in the US. These high asset prices could not be sustained in the face of rising interest rates, and their collapse led to the present crisis. The paper argues that a global regime will be necessary that constrains excessively high savings in East Asia, and elsewhere, and constrains excessive fiscal deficits in the US, and elsewhere. Such a regime would also constrain global imbalances.