The Role of Macroeconomic Policy in Rebalancing Growth
ï»¿ï»¿The aftermath of the global financial crisis of 2007â€“2009 has called the export-led growth model of Asian economies into question. This paper describes the contribution that macroeconomic policy can make to promote a rebalancing of growth away from dependence on exports to developed economies to a more sustainable pattern of growth centered on domestic and regional demand. This represents a significant departure from the traditional uses of macroeconomic policy to stabilize the economic cycle and achieve stable and low inflation. The evidence suggests that macroeconomic policy can successfully contribute to growth rebalancing. Policy measures not only can affect aggregate demand directly, but can also affect it indirectly via their â€œmicroeconomicâ€ impacts on private sector behavior. Although in the long-term fiscal policy should be balanced to maintain government debt stability and avoid crowding out of private investment, there may be substantial scope to expand monetary and fiscal policy in the medium-term to offset the deflationary effects of an appreciating currency during periods of current account reversal. Previous experience suggests that most of the needed stimulus can be provided by monetary policy, with only a supplementary role to be played by fiscal policy. Moreover, Asian economies with large current account surpluses tend to have sufficient fiscal space. The evidence suggests that excessive savings rather than insufficient investment is the main factor behind high current account surpluses in Asian economies. This implies that measures to encourage consumption, either by raising the level of household disposable income or reducing the savings rate are likely to have the highest payoff in terms of reducing imbalances. Increased spending on social protection, including health insurance, unemployment insurance and pensions, as well as investment in education, are seen as key ways to reduce household demand for precautionary savings. Governments can raise investment spending directly through increased government investment, especially infrastructure investment. There also may be large payoffs to making investments to improve the investment climate, thereby encouraging private investment. Cuts in corporate tax rates and government support for deepening of financial markets can also encourage investment, including improving the infrastructure for corporate bond markets, developing credit databases and other infrastructure for SMEs, and developing the infrastructure for microfinance. Cuts in export subsidies and foreign exchange intervention can cut net exports directly. Improvement of frameworks for macroeconomic and financial stability can also support domestic demand by reducing uncertainty and the need for precautionary savings. This includes giving more explicit weight to financial stability as an objective of monetary policy, developing a macroprudential framework for financial surveillance and regulation, and refining policy tools for management of capital flows.
|Date of creation:||Feb 2010|
|Contact details of provider:|| Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200|
Web page: http://www.eaber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Filardo, Andrew & Genberg, Hans, 2010.
"Monetary Policy Strategies in the Asia and Pacific Region: What Way Forward?,"
ADBI Working Papers
195, Asian Development Bank Institute.
- Andrew Filardo & Hans Genberg, 2010. "Monetary Policy Strategies in the Asia and Pacific Region: What Way Forward?," Working Papers id:3139, eSocialSciences.
- Andrew Filardo & Hans Genberg, 2010. "Monetary Policy Strategies in the Asia and Pacific Region : What Way Forward?," Finance Working Papers 23011, East Asian Bureau of Economic Research.
- Shin-Yi Chou & Jin-Tan Liu & James Hammitt, 2006. "Households’ precautionary behaviors—the effects of the introduction of National Health Insurance in Taiwan," Review of Economics of the Household, Springer, vol. 4(4), pages 395-421, December.
- Adams, Charles & Ferrarini, Benno & Park, Donghyun, 2010. "Fiscal Sustainability in Developing Asia," ADB Economics Working Paper Series 205, Asian Development Bank.
- Charles Yuji Horioka & Junmin Wan, 2007. "The Determinants of Household Saving in China: A Dynamic Panel Analysis of Provincial Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 2077-2096, December.
- Charles Yuji Horioka & Junmin Wan, 2006. "The Determinants of Household Saving in China: A Dynamic Panel Analysis of Provincial Data," ISER Discussion Paper 0676, Institute of Social and Economic Research, Osaka University, revised Sep 2007.
- Charles Yuji Horioka & Junmin Wan, 2006. "The Determinants of Household Saving in China: A Dynamic Panel Analysis of Provincial Data," NBER Working Papers 12723, National Bureau of Economic Research, Inc.
- Charles Yuji Horioka & Junmin Wan, 2007. "The determinants of household saving in China: a dynamic panel analysis of provincial data," Working Paper Series 2007-28, Federal Reserve Bank of San Francisco.
- Marcos D. Chamon & Eswar S. Prasad, 2010. "Why Are Saving Rates of Urban Households in China Rising?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 93-130, January.
- Chamon, Marcos & Prasad, Eswar, 2007. "Why Are Saving Rates of Urban Households in China Rising?," IZA Discussion Papers 3191, Institute for the Study of Labor (IZA).
- Marcos Chamon & Eswar Prasad, 2008. "Why are Saving Rates of Urban Households in China Rising?," NBER Working Papers 14546, National Bureau of Economic Research, Inc.
- Prema-Chandra Athukorala & Pang-Long Tsai, 2003. "Determinants of Household Saving in Taiwan: Growth, Demography and Public Policy," Journal of Development Studies, Taylor & Francis Journals, vol. 39(5), pages 65-88.
- Emanuele Baldacci & Ding Ding & David Coady & Giovanni Callegari & Pietro Tommasino & Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Expenditures on Social Programs and Household Consumption in China," IMF Working Papers 10/69, .
- Feng, Jin & He, Lixin & Sato, Hiroshi, 2011. "Public pension and household saving: Evidence from urban China," Journal of Comparative Economics, Elsevier, vol. 39(4), pages 470-485.
- Jin Feng & Lixin He & Hiroshi Sato, 2009. "Public Pension and Household Saving: Evidence from urban China," Global COE Hi-Stat Discussion Paper Series gd08-030, Institute of Economic Research, Hitotsubashi University.
- Chou, Shin-Yi & Liu, Jin-Tan & Hammitt, James K., 2003. "National Health Insurance and precautionary saving: evidence from Taiwan," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1873-1894, September.
- Jha, Shikha & Prasad, Eswar & Terada-Hagiwara, Akiko, 2009. "Saving in Asia: Issues for Rebalancing Growth," ADB Economics Working Paper Series 162, Asian Development Bank.
- Thorbecke, Willem, 2010. "Investigating the Effect of Exchange Rate Changes on the People's Republic of China's Processed Exports," ADBI Working Papers 202, Asian Development Bank Institute.
- Schou-Zibell, Lotte & Madhur, Srinivasa, 2010. "Regulatory Reforms for Improving the Business Environment in Selected Asian Economies - How Monitoring and Comparative Benchmarking Can Provide Incentive for Reform," Working Papers on Regional Economic Integration 40, Asian Development Bank. Full references (including those not matched with items on IDEAS)