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High Growth and Low Consumption in East Asia: How to Improve Welfare While Avoiding Financial Failures

  • Céline Rochon
  • Andrew Feltenstein
  • Maral Shamloo

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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Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/278.

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Length: 33
Date of creation: 01 Dec 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/278
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  13. WHALLEY, John & XIN, Xian, 2010. "China's FDI and non-FDI economies and the sustainability of future high Chinese growth," China Economic Review, Elsevier, vol. 21(1), pages 123-135, March.
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  19. Blonigen, Bruce A, 1997. "Firm-Specific Assets and the Link between Exchange Rates and Foreign Direct Investment," American Economic Review, American Economic Association, vol. 87(3), pages 447-65, June.
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