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

By Celine Rochon, Andrew Feltenstein, Maral Shamloo

December 1, 2007

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Celine Rochon, Andrew Feltenstein, and Maral Shamloo. High Growth and Low Consumption in East Asia: How to Improve Welfare While Avoiding Financial Failures, (USA: International Monetary Fund, 2007) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Banking, Consumption, Exchange rates, Foreign direct investment, Real interest rates

Keywords: Exchange rate, Interest rate, Rate of return, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/278
Stock No:

WPIEA2007278
ISBN:

9781451868418
ISSN:

1018-5941

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