sunrise CUP


The need for a macroeconomics textbook suited to East Asia became all too clear to me when I taught the subject to students from all over Asia at the Lee Kuan Yew School of Public Policy of the National University of Singapore. Our pre-selected text was an American standard by Frank and Bernanke that, not unreasonably considering the intended audience, relegated the balance of payments and exchange rates to the final chapter. In American macroeconomic instruction, the rest of the world may be safely treated as an afterthought. Not so for Asian students. In their countries of origin, macroeconomic stability is under constant threat of external shock. From the whims of foreign capital washing in and out, to the gyrations of world commodity prices, to movements in the exchange rates of trading partners, global forces can wreak havoc. Under such circumstances, an understanding of the balance of payments and exchange rates is foundational to macroeconomic analysis.

But the need for better understanding extends beyond the Asian classroom. During my time at NUS, China came under fire from the US for “currency manipulation”. To be sure, the Chinese central bank was at the time buying up dollars and selling renminbi to moderate a rise in the value of its currency. In this, the Chinese authorities acted judiciously to chart a course of long term currency stability while maintaining strong economic growth. The upward pressure on the renminbi was due largely to factors that would subside in time (demographics and a saving/investment imbalance*), and an overshooting of the exchange rate with subsequent pressure on the renminbi to depreciate would be harder to contend with than the immediate pressure for appreciation. Indeed, we have seen such a reversal in exchange rate pressure and its attendant challenges play out. More generally, for most of the world’s economies the exchange rate is a vital instrument of macroeconomic policy that is in fact often invoked to counter shocks emanating from US manipulation of its own chosen policy instrument, the interest rate. When the US central bank lowers interest rates, for example, capital flows out of the US to other countries thereby putting upward pressure on their currencies and disrupting their trade balances. Central banks can lean against this by buying dollars and selling domestic currency. That Americans are so quick to cry foul when other countries use stabilization measures suited to their circumstances despite the shock waves its own measures generate suggests a need for Americans to broaden their comprehension of macroeconomics as experienced elsewhere.

Finally, one chapter in the text is motivated by a desire not to tailor an analysis to Asia but to offer a generally applicable alternative to the standard paradigm. That is the chapter on business cycles. The standard textbook treatment would more appropriately refer to “fluctuations” than to “cycles”. Indeed, Gregory Mankiew in his popular macro text uses “cycle” in the title of an overarching section of the book, then immediately switches to “fluctuations” in the title of the first chapter of that section. He explains that the term cycles “suggests that economic fluctuations are regular and predictable” whereas in fact they are not. (9th Edition, p. 281) He goes on to develop a theory of fluctuations based on exogenous shocks to an economic system that is understood to gravitate to an equilibrium steady state. This is the essence of the standard paradigm. Within the history of economic though, however, there is to be found another way of thinking about business cycles which posits not that they are regular and predictable, but nevertheless that they are the outcome of an endogenous dynamic process. Proponents of an endogenous cycle theory have included Walter Bagehot (1874), Joseph Schumpeter (1954), and Hyman Minsky (1986). My treatment of business cycles develops both the mainstream exogenous shock theory and the alternative endogenous cycle theory, and ultimately synthesizes the two following Bagehot. With this richer set of tools we are able to understand exogenous shocks as acting upon an economy that is by turns vulnerable and resilient over the course of a cycle rooted in credit expansion and tightening.

In sum, while borne of a desire to reach students of macroeconomics in Asia, this book will, I hope, offer content of value to audiences beyond Asia as well.   


*See Carl Bonham and Calla Wiemer, “Chinese Saving Dynamics: The Impact of GDP Growth and the Dependent Share”, Oxford Economic Papers, 65(1), January 2013. I also wrote a series of op-eds for the Wall Street Journal on the subject, including here, here, and here.