Global Imbalances and the Paradox of Thrift

Global imbalances refer to current account surpluses and deficits. This is a form of international intertemporal trade, and the neoclassical approach suggests that there are gains from trade, and hence there may be no problem created by global imbalances. This paper presents qualifications to this argument. A crucial concept is the "return journey", namely the need for borrowers to pay interest (or dividends) and eventually to be able to repay. Thus savings must lead to investment, which provides the future resources to enable the return journey. If borrowing is used to finance current consumption, wars, or unwise ("unfruitful") investment, such as excessive housing construction, the result will be a crisis. In this way the high net savings of some countries actually led to the recent crisis. This is a new version of Keynes’ “paradox of thrift” The central issue on which this paper focuses is the failure of high net savings by the “savings glut” countries to lead to fruitful investment in other countries, both in the United States and in developing countries. Hence a crisis was caused by the lack of provision for the return journey.Global imbalances, paradox of thrift, financial crisis, instability of capital flows, world savings glut, quantitative easing

Strategic trade policy : how new? how sensible?

This paper reviews some recent developments in the theory of trade policy that have to do with imperfect competition, strategic interactions as a result of oligopoly, and economies of scale. All these developments have been described as the"new international economics."In the view of some they represent major breakthroughs. One purpose of this paper is to examine how new some of this is and how it relates to the orthodox theory. The paper will focus on one major aspect of these developments, namely"Brander-Spencer profit sharing"and its policy implications. The conclusion is that it relates closely to the existing framework of the orthodox theory of trade policy.Economic Theory&Research,Environmental Economics&Policies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Trade Policy,General Technology

¿Importa la cuenta corriente? El punto de vista tradicional y el moderno

En este artículo compararé el “punto de vista tradicional” y el “punto de vista moderno” sobre la cuenta corriente. Mi propia perspectiva va de acuerdo con el punto de vista moderno, pero dedicaré gran parte de este artículo a explorar posibles salvedades al mismo. Puesto que ambos enfoques son ya bien conocidos, la contribución de este artículo consiste en la búsqueda de estas salvedades. El punto de vista tradicional mantiene que la cuenta corriente es desde luego importante y que, en general, los así llamados desequilibrios en la cuenta corriente son indeseables y requieren medidas, en especial si es improbable que sean “sostenibles”. El punto de vista moderno considera que la cuenta corriente no tiene importancia alguna para la elaboración de la política económica, aunque varios de los elementos que la determinan ciertamente son relevantes para tal propósito.

Trade policy and exchange rate issues in the former Soviet Union

The author reviews possible trade and exchange rate policies of the former Soviet Union. Alternative exchange rate regimes, including a monetary union are considered. For Russia, a fixed but adjustable regime is most realistic. Frequent adjustment may be desirable, to prevent the use of trade restrictions to achieve balance of payments objectives. The author examines the need for transitional tariffs, including the argument for a temporary uniform tariff that is higher than the long-run revenue tariff. The temporary uniform tariff is designed to prevent temporary overshooting of the exchange rate. The case for a free trade area is strong because the republics of the former Soviet Union are so highly specialized, but there will be problems if price controls remain and differ among the republics. There could be a free trade area even if there is no monetary union. The author concludes that one approach to trade policy is to have no trade policy - to have completely free trade with convertibility for current account transactions. Some tariffs and export taxes may be justified, at least as second-best policies. If so, the author stresses that four principles be observed: 1) barriers to existing trade between the republics should not be set up; 2) all quantitative control measures should be avoided; 3) tariff and export tax structures should be very simple; and 4) trade policy should be transparent.Economic Theory&Research,Environmental Economics&Policies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Stabilization,Fiscal&Monetary Policy

The Dutch Disease in Reverse: Iceland's Natural Experiment

For a long time, abundant natural resources brought Iceland a high and volatile real exchange rate with adverse effects on manufacturing and services. During 2003-2008, another national treasure, the sovereign’s AAA rating, was used by privatized banks to attract foreign capital, elevating the real exchange rate even further. The financial collapse and the associated collapse of the currency in 2008 left the country with a large foreign debt which offset some of the effect of the natural resources on the real exchange rate. In effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists following the financial collapse. This paper discusses the behavior of the exchange rate of the Icelandic króna before and after 2008 as well as its relationship to natural resources, capital flows, output, exports and imports, including tourism