High Growth and Low Consumption in East Asia: How to Improve Welfare While Avoiding Financial Failures, Issues 2007-2278
International Monetary Fund, 2007 - Investments, Foreign - 33 pages
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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adaptive expectations Asian bank assets banking system benchmark budget deficit capital flows capital in period capital stock capital types changes in FDI China Chinese Consumer consumer's debt default at end depreciation domestic and foreign domestic assets domestic currency domestic investors East Asia end of period estimates export-platform FDI FDI flows FDI GDP FDI in Period FDI series financial assets firm fixed exchange rate foreign borrowing Foreign Direct Investment foreign interest rate foreign investor government in period growth rates home currency increase consumption independent variables indices are normalized inflation insolvency interest rate differentials International Monetary Fund intertemporal Kydland loans markets Maskus nominal interest rates non-performing assets OECD optimal panel data paper parameter period 8 default precautionary savings private consumption rate in period rate of return rational expectations Real GDP real interest rates regression return to capital revaluation rise specific suppose Table total assets urban labor