Inflation and the E M S

Since the European Monetary System was instituted in March 1979, there has been a dramatic reduction in the inflation rates of member countries This development is widely attributed to the EMS itself. The purpose of this paper is to argue that the theoretical and empirical basis for such a claim is far from conclusive. On the theoretical side, the paper develops a model which highlights two issues. First, changes in the "rules" of the exchange rate system need not coincide with changes in expectations about Central Bank behavior. In fact, I expectations in France do not seem to have changed until policy makers "got tough" in 1982-83. Second, different researchers have made quite different I assumptions about exactly what "rules" the EMS imposes. The paper shows that how the system works matters in terns of the effect joining will have on inflation. On the empirical side, the paper shows that effects which have been attributed to the EMS are in large part due to the global deflation since 1979 and to the fact that EMS members had relatively low inflation before 1979. However, even these estimates should be interpreted with caution. They are very sensitive to time period and to which non EMS countries are included in the sample.

Patterns of international capital flows and their implications for economic development : commentary

Capital ; Economic development

Rebalancing the US Economy in a Postcrisis World

The objective of this paper is to explore how the external balance of the United States (US) might evolve in future years as the economy emerges from the recession. We examine the issue from the domestic perspective of the saving and investment balance and from the external side in terms of the basic determinants of exports and imports and the role of the real exchange rate. Using these two respective perspectives, we highlight (1) causes and consequences of low private and public saving in the US, and (2) sensitivity of trade to variations in the real exchange rate. We highlight the need for sustained depreciation of the dollar to improve the competitiveness of US exports and argue that the current exchange rate is consistent with a significant reduction in the size of the trade deficit. However, the favorable external outlook is very inconsistent with a projected domestic situation of low rates of private saving and a very large public sector budget deficit matched by a cyclically depressed rate of investment. Changes in US corporate tax structure, reconsideration of capital controls, and perhaps some further decline in the level of real exchange rates could help soften the impact of a potentially very hard postrecession landing for the United States.savings rate, exchange rate policy

Accounting for Growth: Comparing China and India

We compare the recent economic performances of China and India using a simple growth accounting framework that produces estimates of the contribution of labor, capital, education, and total factor productivity for the three sectors of agriculture, industry, and services as well as for the aggregate economy. Our analysis incorporates recent data revisions in both countries and includes extensive discussion of the underlying data series. The growth accounts show a roughly equal division in each country between the contributions of capital accumulation and TFP to growth in output per worker over the period 1978-2004, and an acceleration of growth when the period is divided at 1993. However, the magnitude of output growth in China is roughly double that of India at the aggregate level, and also higher in each of the three sectors in both sub-periods. In China the post-1993 acceleration was concentrated mostly in industry, which contributed nearly 60 percent of China’s aggregate productivity growth. In contrast, 45 percent of the growth in India in the second sub-period came in services. Reallocation of workers from agriculture to industry and services has contributed 1.2 percentage points to productivity growth in each country.

External Debt and Macroeconomic Performance in South Korea

During 1980-1986, South Korea went from being the world's fourth largest debtor country, in the midst of an economic crisis, to a model of successful adjustment, with high growth rates and a current account surplus. This paper summarizes the findings of an in depth analysis of Korea's performance, focusing on the experience with external debt. We argue that the explanations for Korea's recovery are closely linked to the explanations for Korea's very rapid growth during the 1960s and 1970s. The centerpieces have been a comprehensive export focused investment plan with external borrowing wed to supplement domestic savings in financing the investment and an active, interventionist government policy.