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Was The Worldwide Asymmetry In Current Accounts Caused By The Macroeconomic Policy Of The Global Economy’S Leader?

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  • Georg QUAAS

Abstract

Some authors sketch the causal chain that produced the current account surplus in China and the current account deficit of the US (as a part of global imbalances) as follows: declining interest rates in the US cause a redirection of capital flows into the periphery, rising capital inflows into China and other Asian countries trigger currency purchases by periphery central banks, and increasing stocks of foreign reserves on the asset side in the central bank balance sheet are matched by a proportional increase of reserve money on the liability side. To keep the exchange rate stable, foreign reserves are accumulated and reserve money expands. The Peoples Bank of China is trying to fight the inflation pressure with several measures, among them higher interest rates. This attracts even more foreign capital to China. Moreover, it cannot solve a problem that originates in the macroeconomic policy of the global economy’s leader – a crucial point in this argument is the redirection thesis. The empirical evidence does not support this thesis in several respects – there is no evidence for a redirected capital flow away from the US toward China, and there is no evidence that interest rates controlled by the Federal Reserve are the cause of the capital flow to China.

Suggested Citation

  • Georg QUAAS, 2010. "Was The Worldwide Asymmetry In Current Accounts Caused By The Macroeconomic Policy Of The Global Economy’S Leader?," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 5(2(12)/Sum), pages 138-146.
  • Handle: RePEc:ush:jaessh:v:5:y:2010:i:2(12)_spring2010:p:106
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    References listed on IDEAS

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    1. Menzie Chinn & Jeffrey A. Frankel, 2007. "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?," NBER Chapters,in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 283-338 National Bureau of Economic Research, Inc.
    2. Schnabl, Gunther & Freitag, Stephan, 2009. "An asymmetry matrix in global current accounts," Working Papers 76, University of Leipzig, Faculty of Economics and Management Science.
    3. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
    4. Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2005. "An essay on the revived Bretton Woods system," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
    5. Ben S. Bernanke, 2005. "The global saving glut and the U.S. current account deficit," Speech 77, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Quaas, Friedrun & Quaas, Georg, 2016. "Effekte des Geldmarktzinses auf die Preis- und Produktivitätsentwicklung. Eine Analyse der deutschen Volkswirtschaft 1970-2014
      [Effects of the money market interest rate on the development of price
      ," MPRA Paper 69632, University Library of Munich, Germany.

    More about this item

    Keywords

    global imbalances; current account surplus; current account deficit;

    JEL classification:

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

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