Impacts, Transmission and Recovery
Edited by Maurice Obstfeld, Dongchul Cho and Andrew Mason
Chapter 6: Imbalances, Overheating and the Prospects for Global Recovery
Menzie D. Chinn INTRODUCTION As policymakers contemplate the prospects for the world economy, and what policy measures should be undertaken to promote sustainable growth, several questions arise. First, how important were the global imbalance and global overheating in explaining the global crisis of 2008–09? Second, how did trade exposure propagate the negative shock? Third, how important was sustained domestic demand in Asia (particularly China) in protecting the global economy from experiencing an even greater downturn? Fourth, are the global imbalance and global overheating being corrected, or have they been sufficiently adjusted? It might appear that one could move forward on the policy front without addressing the first question. In my opinion, this is a flawed perspective; without tackling the sources of the financial crisis and the ensuing global “great recession”, one cannot fully determine the appropriate course of action, in terms of rebalancing the global economy, so that we avoid a recurrence of unsustainably expanding current account balances, or overheating or falling to deflation. Hence, the first question is hardly academic, and indeed the answer is essential to answering the fourth question. The answers to the other questions speak to the pace and nature of the global economic recovery. In particular, while trade links (the second question) were a particularly visible means by which the reduction in aggregate demand was transmitted, I do not think that was the only, or even a key, propagation channel. In particular, with respect to the other core developed economy, the repricing of risk,...
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