Edited by Koichi Hamada, Beate Reszat and Ulrich Volz
Chapter 6: East Asia’s Role in the Revived Bretton Woods System
Michael P. Dooley, David Folkerts-Landau, and Peter Garber 6.1 INTRODUCTION AND SUMMARY OF RESULTS In this chapter, we set out in greater detail how we think about the emergence of China and Asia as major players in world capital and foreign exchange markets. Our approach, which has come to be known as the Bretton Woods II view, provides a coherent explanation for the current structure of interest rates, exchange rates, and current account balances and also provides a contingent playbook for future interest and exchange rate movements. We argued in 2003 and 2004 that the de facto global system was analogous to that during the Bretton Woods period because of the existence of a macroeconomically important periphery that fixed an undervalued exchange rate to the dollar to promote an export-driven development policy. The US willingly played the role of center country again, running balance of payments deficits and serving as the global financial intermediary. Further, contrary to most forecasts at the time, we claimed that the system would last for a long time because of the incentives, especially those of China, to absorb a vast pool of underemployed labor into the industrial system.1 Conventional analyses are based on the assertion that the Bretton Woods II system cannot hold together for much longer. This may or may not turn out to be correct, but it does not offer any guidance for further analysis if the system does survive for an extended time period, as we believe it will. For simplicity, our...
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