Monday, April 03, 2006

Barry Eichengreen and the World Economy

Eichengreen provides an analysis of the imbalances in the World Economy similar to that offered by Wolf, as I discussed in an earlier post, but focussing in upon an analysis of different views on the size and importance of the US current account deficit. It is less broad than Wolf and probably less interesting for the policy minded but deals more throroughly with the economic questions behind the problem.

The main weakness he seems to miss of the 'Savvy Investor' view is that it requires foreign investors to be consistently poor decision makers. It would seem likely that if they continue to make poor decisions when investing in the US there is every chance that they will reduce their investment there rather than pressing on regardless. In this regard it appears to be vulnerable to the Lucas critique.

His policy recommendation is the same as the fiscal component of Wolf's but without the focus on changes in developing country financial regulation. He simply advises tighter fiscal policy in the US and more expansionary policy in the developing world. I think Wolf's view is more useful here as changing fiscal policy without suitable financial institutions in the developing world would seem the route to a crisis which would probably have ugly consequences in China in particular.

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