Policy Responses from Four Economies
Edited by Daigee Shaw and Bih Jane Liu
Chapter 2: A Perspective on the US Dollar after the Current Financial Crisis: Lessons from the Fall of the Pound Sterling and the Gold Standard after World War I
1 Lee-Rong Wang Global imbalances have been one of the important and puzzling policy issues in the international policy arena since 2003. A global imbalance consists of a number of related and remarkable developments primarily in the United States (the US hereinafter) and East Asia, namely, large US current-account deficits, large Chinese current-account surpluses, a large accumulation of foreign reserves among the Asian countries, low global real interest rates, and the large current-account surpluses of oil-producing nations. Such imbalances might be expected to point to substantial dollar depreciation and Chinese currency appreciation. Many economists have predicted (or wished for) a fall in the dollar, but all have been disappointed – at least so far. Clearly a number of different actors are present in the global imbalance phenomenon, and it is difficult to pinpoint a single cause that is most important. Dooley et al. (2008) examine one view of an important minority regarding the origin and sustainability of global imbalances. They argue that the current situation of large US current-account deficits and large East Asian surpluses can be expected to continue for some time, since it is in the interest of all the relevant parties. Fukuda and Kon (2008) argue that a preference for dollar assets exhibited by East Asian countries can help explain the flows of Asian capital to the US. This chapter, by examining the history of the great powers, explores the possibility of a dying-away of such global imbalances following the current financial crisis. Based on the experiences of...
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