About the Book
As diverse as the economies of East Asia are in obvious ways, they have a lot in common with each other from a macroeconomic standpoint and little in common with the United States, which is nevertheless the country most macro textbooks used in the region are written about. Thirteen economies are covered in this book: Cambodia; China; Hong Kong; Indonesia; Korea; Laos; Malaysia; Myanmar; the Philippines; Singapore; Taiwan; Thailand; and Vietnam. They share the following features: (i) internal balance, involving output growth at potential with low inflation, and external balance, involving sustainable foreign trade and capital flows, are jointly important for macroeconomic stability; (ii) the exchange rate and the interest rate interwine as instruments of stabilization policy; and (iii) policy space is constrained by debt sustainability concerns for fiscal policy and by global capital flows for monetary policy. By contrast, because the US is in the unique position of printing the world’s reserve currency, matters of external balance, debt sustainability, and global capital flows do not figure at all in US macro textbooks. Further, because the US financial system is mature and globally dominant, the interest rate serves as an effective, finely tuned instrument of monetary policy while the exchange rate is of no regard.
The organization of the book differs from that of the standard US macro text by treating the balance of payments and exchange rates as foundational. Once the system of national accounts for measuring the domestic economy has been laid out, the balance of payments accounts are introduced. This sets the stage for presenting the basic identity equating an excess of national saving over domestic investment with a capital outflow that must be matched by a trade surplus. The basics of money creation are then explained with reference to the central bank balance sheet so as to illuminate the parallel between domestic bonds and foreign currencies for central bank trading operations. A full elaboration of the role of the exchange rate in bringing about internal and external balance follows with the implications of central bank intervention highlighted. Foundations thus in place, attention turns to how an economy responds to shocks and why performance is prone to fluctuate over time.
The policy chapters follow. Monetary policy is discussed with regard to the interaction of the interest rate and the exchange rate as instruments. Fiscal policy is examined with attention to debt sustainability. The coordinated exercise of monetary and fiscal policy for pursuit of internal and external balance is then analyzed with use of the Swan diagram. Two further chapters deal with macroprudential policy and the management of crises. The Epilog takes on charges of "currency manipulation" levied against China and others to emphasize the fundamental role played by the exchange rate in Asian monetary policy.
Throughout, empirical data are presented comparing the 13 economies on key indicators. For most chapters, one economy in particular is the subject of a case study.