One of the thorniest issues that arises when there are discussions on reducing governmental barri... more One of the thorniest issues that arises when there are discussions on reducing governmental barriers to economic integration concerns agriculture. This is true whether the negotiations are intra-national (between states or provinces), minilateral (as with free-...
The views expressed at the conference-which saw participation by over fifty researchers, governme... more The views expressed at the conference-which saw participation by over fifty researchers, government officials and analysts from China, Japan and Australiaare presented in a report just published by the Australia-Japan Research Centre in October 1995 entitled China, East Asia and International Trade Policies. A further conference on the next phase of the research project is scheduled to be held in Tokyo in 1996, leading up to the publication of a major research report that summarises the main results of this research.
Although the 'country runs' of the Asian crisis stopped at the Chinese border, their effects none... more Although the 'country runs' of the Asian crisis stopped at the Chinese border, their effects nonetheless included a realignment of real exchange rates and a rise in the risk premium demanded of investments in China. These appear to have combined with a rise in the domestic savings rate to slow the country's economic growth and its rate of labour absorption. The government's macroeconomic policy responses were to fix parity with the US dollar, undertake a fiscal expansion and, more recently, raise the minimum wage. This paper uses an elemental comparative static model, combining graphical with numerical analysis, to examine the changes in the Chinese economy due to the crisis and the contemporaneous domestic shocks.
Clear progress has been made in economic reform under the “Abenomics” first arrow (monetary polic... more Clear progress has been made in economic reform under the “Abenomics” first arrow (monetary policy) and measurable progress has also been made under the second (taxation reform). The third, which emphasises reforms to labour markets, company tax and competition, particularly in the hitherto highly protected services sector, has been more politically difficult and slower to emerge. This paper explores the gains that are possible from these three elements of the third arrow program. Economic rents and industry concentration levels are first identified from Nikkei firm specific data and used to construct an economy-wide model that represents oligopoly behaviour and its regulation explicitly. The analysis finds that modest gains in both efficiency and growth are available from increases in Japan’s labour supply and reductions in company tax rates, while substantial gains are possible from active competition policy that embodies pricing surveillance and price cap regulation, particularly...
China's financial openness, as measured by cross border flows and asset ownership, peaked during ... more China's financial openness, as measured by cross border flows and asset ownership, peaked during its 2000s growth surge, as did downward pressure on global interest rates and price levels. This was despite China's restriction of financial inflows to approved FDI and tight controls on private outflows. We analyze the global effects of the growth surge and their dependence on these financial policies by employing a global macro model with national portfolio rebalancing, in which flexibility in asset differentiation is used to index financial integration. The results suggest that, globally, the growth surge raised asset prices, reduced yields and bolstered deflationary pressures, while improving aggregate economic welfare. It is shown that, without capital controls, most surge effects on China would have been moderated substantially while the global impacts would have been larger.
With the recent rise of populism and authoritarian politics multilateral agreements have been res... more With the recent rise of populism and authoritarian politics multilateral agreements have been resisted and there are increasing trade disputes, the US-China conflict being a case in point. This paper uses a calibrated global macro model to assess the potential economic consequences of this conflict under explicit assumptions about monetary and fiscal policy. US unilateral protection emerges as "beggar thy neighbor" policy, by most if new tariff revenue affords capital tax relief. China's proportional losses are large, little mitigated by its retaliation, which nonetheless constrains US net gains. Avoiding leakage by protecting against all sources causes large losses in third regions trading with China and the US. 3 implications. An elemental six-region global macro model is used that captures trade in final and intermediate goods as well as financial flows, with some attention to household heterogeneity, and which makes monetary and fiscal policy responses explicit. Key features of the model include that capital owning households manage global portfolios of variably differentiated regional assets, and monetary policies target inflation in the US, Europe and Japan, as well as in smaller advanced regions like Australia, "anchoring" inflation expectations. In China, on the other hand, we see monetary policy targeting its US exchange rate, creating a mismatch between actual and expected inflation. Two types of solutions are obtained, one under short run assumptions, with varying unemployment levels and fiscal deficits but fixed capital use, and another in which time is allowed for financial flows to redistribute productive capacity across countries, for labor markets to adjust and for fiscal balance to be retained via changes in tax rates or government expenditure. At either length of run trade distortions alter the relativities between consumer, producer and GDP prices, wage rates and capital returns. Since all regions are characterized as "large", unilateral increases in protection by any one region can raise domestic "welfare" at the expense of other regions, though such protection can shrink the volume of its own, and of global, output. We offer several policy scenarios to reflect alternative trajectories of the trade conflict, depending on the actions taken by the US and China and on whether there is further escalation. These include unilateral protection by the US against Chinese imports, protection by the US with bilateral retaliation by China, and the avoidance of leakage via protection against all imports by both the US and China. Several conclusions emerge. First, US real wage rates and welfare more generally are indeed raised by unilateral protection against China, by most when the additional revenue from tariffs affords capital income tax relief but far less substantially if there is retaliation from China or elsewhere. Second, while the economic losses from the trade conflict are comparable across regions outside the US on a "dollars per capita" basis, the losses to China are much larger as a proportion of initial disposable income. This is also true for effects on China's real GDP and its real low-skill wages, suggesting that it has the strongest motive to renegotiate trade arrangements. Third, trade wars can be significantly damaging not only for at least one of the protagonists, but also for third regions, reducing both output and welfare globally. And finally, since trade could leak around new protectionist barriers, if the two protagonists in the conflict Australia China Japan United States France Germany Source: SWIID database. Note: The orange line is Gini index of inequality in equivalized household market (pre-tax and pre-transfer) income. The blue line is Gini index of inequality in "equivalized" household disposable (post-tax and post-transfer) income.
Continued automation and declines in low-skill shares of GDP have been widespread globally and li... more Continued automation and declines in low-skill shares of GDP have been widespread globally and linked to inequality. We examine the long-term, global consequences of policies that foster automation or address the distributional consequences of it, using a six-region global macro model. Results depend on whether welfare criteria are Rawlsian, emphasizing the performance of low-skill households, Benthamite, which aggregate pecuniary measures, capital-owner friendly, or simply based on real GDP. Even where automation delivers only bias against the low skilled, we find that the fostering it is a dominant strategy under all but the Rawlsian criterion. We then consider a post automation scenario in which worker displacement is significant, examining inequalityconstraining but balance-preserving fiscal interventions, such as tax-financed "earned income tax credits". These generate only small international spillover effects and are for the most part not preferred under all criteria except the Rawlsian one.
Proximity to short yield zero lower bounds has challenged the inflation targeting central banks o... more Proximity to short yield zero lower bounds has challenged the inflation targeting central banks of the advanced regions. Central to this development are three-decade declining trends in long yields and underlying real, equilibrium interest rates that have flattened yield curves, restricting "normalisation" and adding deflationary pressure by boosting demand for portfolio money. Inflationary forces, such as fiscal deficits, industrial protection and resurgent regional growth, have proved comparatively weak. In this paper global modelling is used to show that key deflationary forces in these regions include automation, the race to the bottom in capital taxation and immigration. Each is shown to redistribute income so as to expand the welfare gap between the low-skilled and capital owners by 2.5 to 3.5 per cent per year. The high saving rates of capital owners depress real equilibrium rates and their expanding portfolios demand monetary expansion. These forces ensure that the challenges of macro stabilisation and distributional policy making are both intertwined and urgent.
Progress has been made in economic reform under the "Abenomics" first (monetary policy) and secon... more Progress has been made in economic reform under the "Abenomics" first (monetary policy) and second (taxation reform) "arrows". The third, which emphasises structural reforms, has been more politically difficult, thus far yielding mixed results. This paper explores the gains that are possible from the labour market, tax and competition reforms embodied in the third arrow program. Economic rents and industry concentration levels are first identified from Nikkei firm specific data and used to construct an economy-wide model that represents oligopoly behaviour and its regulation explicitly. The analysis finds that modest gains in efficiency are available labour growth and, when it is accompanied by corporate governance reform, the switch between company and consumption taxation. Larger gains are shown to be available from active competition policy and, particularly, from productivity enhancing FDI in services. Central to the results is that a resurgent Japanese economy requires efficiency improvements that raise home rates of return and rebalance its large home and foreign asset portfolio toward home investment and capital growth.
Indonesia fielded shocks due to the Asian financial crisis (AFC) and the global financial crisis ... more Indonesia fielded shocks due to the Asian financial crisis (AFC) and the global financial crisis (GFC) quite differently. Financial contagion, policy misdirection, panic and political upheaval saw the AFC bring economic collapse. The decade-later GFC, however, brought real growth of 6.1% (2008) and 4.5% (2009), amongst the world's best performances at the time. This paper reviews these events and employs numerical modelling of stylized AFC and GFC shocks to show that some of the contrast stems from differences in the shocks and intervening changes in economic structure. Critically, IMF conditionality during the AFC required unsustainably contractionary reforms. Capital flight elements were present in both crises, however, and exchange rate depreciations and money-financed fiscal expansions are shown to have contributed significantly to resolution.
Insights into the international implications of China's entry to the large economy club and the f... more Insights into the international implications of China's entry to the large economy club and the four-region strategic behaviour that results can be derived from applications of the elemental multi-region, macroeconomic simulation model introduced in this paper. It has a global general equilibrium structure that embodies bilateral linkages between represented regions via both trade and investment. Its behaviour is illustrated with an application to monetary policy following a period of deflationary expectations. Unilateral expansions are shown clearly to have negative real implications for the other large economies whose central banks are forced to respond in kind. * Thanks for assistance with the construction of the database for this model go to Ying Zhang and Tsun Se Cheong.
Opinion over the global implications of China's rise is divided between critics, who see it as ha... more Opinion over the global implications of China's rise is divided between critics, who see it as having developed at the expense of both investment and employment in the US, Europe and Japan and proponents who emphasise improvements in the terms of trade and reductions to the cost of financing that stem from China's supply of light manufactures, its demand for Western capital and luxury goods and its high saving. The criticism implies Keynesian assumptions while proponents take a neoclassical perspective. In this paper, both are embodied in a global macro model that emphasises bilateral linkages via both trade and investment, with monetary spill-overs represented by globally integrated bond markets. Net gains are suggested for the US and Europe from China's successful export-oriented growth, though there are partially offsetting Keynesian effects. China's recent slower, more consumption focussed growth appears also to be beneficial in those regions and in Japan notwithstanding terms of trade losses.
Assistance in the early stages of DP0557885 was provided by Lucy Rees, Pingkun Hsu and Marcin Pra... more Assistance in the early stages of DP0557885 was provided by Lucy Rees, Pingkun Hsu and Marcin Pracz, and more recently, by Tsun Se Cheong and David Sami. Finally, all technical analysis for the paper is performed using the Gempack modelling software.
China is transitioning toward more inward-focussed growth, causing adverse changes in the product... more China is transitioning toward more inward-focussed growth, causing adverse changes in the product and financial terms of trade in the advanced economies. At the same time, international financial markets tussle between tightening forces associated with the US recovery on the one hand and unconventional monetary expansion in Europe and Japan on the other. The way these shocks interact is examined in this paper using a global macro model with national portfolio rebalancing and asset differentiation and a representation of unconventional monetary policy. Results are found to be sensitive to the contributions of productivity and capital accumulation to China's growth. When these are offered in realistic combination, the combined shocks are deflationary in the US and China, implying that contractionary US monetary policy is not imminent. Monetary responses in the US and China then combine with price targeting regimes in the EU and Japan to expand liquidity globally, amplifying impacts on financial markets and the global distribution of real investment.
* Funding for the research described in this paper is from Australian Research Council Discovery ... more * Funding for the research described in this paper is from Australian Research Council Discovery Grant No. DP0557885. It was conducted in part during visits to the China Center for Economic Research (CCER) at Peking University. Special thanks are due to Feng LU and Ling HUANG at Peking University for many constructive conversations on the topic and to Peter Dixon, Yew-Kwang NG, James Giesecke, Yuanfang LI, Miaojie YU, Yongxiang BU and to other participants at lively CCER and CoPS seminars. More recently, valuable comments on the latest draft have been received from Ligang SONG and Warwick McKibbin. Research assistance was provided by Pingkun HSU at the ANU, Liu LIU at the CCER and at the UWA Business School by Ying ZHANG and Tsun Se CHEONG.
One of the thorniest issues that arises when there are discussions on reducing governmental barri... more One of the thorniest issues that arises when there are discussions on reducing governmental barriers to economic integration concerns agriculture. This is true whether the negotiations are intra-national (between states or provinces), minilateral (as with free-...
The views expressed at the conference-which saw participation by over fifty researchers, governme... more The views expressed at the conference-which saw participation by over fifty researchers, government officials and analysts from China, Japan and Australiaare presented in a report just published by the Australia-Japan Research Centre in October 1995 entitled China, East Asia and International Trade Policies. A further conference on the next phase of the research project is scheduled to be held in Tokyo in 1996, leading up to the publication of a major research report that summarises the main results of this research.
Although the 'country runs' of the Asian crisis stopped at the Chinese border, their effects none... more Although the 'country runs' of the Asian crisis stopped at the Chinese border, their effects nonetheless included a realignment of real exchange rates and a rise in the risk premium demanded of investments in China. These appear to have combined with a rise in the domestic savings rate to slow the country's economic growth and its rate of labour absorption. The government's macroeconomic policy responses were to fix parity with the US dollar, undertake a fiscal expansion and, more recently, raise the minimum wage. This paper uses an elemental comparative static model, combining graphical with numerical analysis, to examine the changes in the Chinese economy due to the crisis and the contemporaneous domestic shocks.
Clear progress has been made in economic reform under the “Abenomics” first arrow (monetary polic... more Clear progress has been made in economic reform under the “Abenomics” first arrow (monetary policy) and measurable progress has also been made under the second (taxation reform). The third, which emphasises reforms to labour markets, company tax and competition, particularly in the hitherto highly protected services sector, has been more politically difficult and slower to emerge. This paper explores the gains that are possible from these three elements of the third arrow program. Economic rents and industry concentration levels are first identified from Nikkei firm specific data and used to construct an economy-wide model that represents oligopoly behaviour and its regulation explicitly. The analysis finds that modest gains in both efficiency and growth are available from increases in Japan’s labour supply and reductions in company tax rates, while substantial gains are possible from active competition policy that embodies pricing surveillance and price cap regulation, particularly...
China's financial openness, as measured by cross border flows and asset ownership, peaked during ... more China's financial openness, as measured by cross border flows and asset ownership, peaked during its 2000s growth surge, as did downward pressure on global interest rates and price levels. This was despite China's restriction of financial inflows to approved FDI and tight controls on private outflows. We analyze the global effects of the growth surge and their dependence on these financial policies by employing a global macro model with national portfolio rebalancing, in which flexibility in asset differentiation is used to index financial integration. The results suggest that, globally, the growth surge raised asset prices, reduced yields and bolstered deflationary pressures, while improving aggregate economic welfare. It is shown that, without capital controls, most surge effects on China would have been moderated substantially while the global impacts would have been larger.
With the recent rise of populism and authoritarian politics multilateral agreements have been res... more With the recent rise of populism and authoritarian politics multilateral agreements have been resisted and there are increasing trade disputes, the US-China conflict being a case in point. This paper uses a calibrated global macro model to assess the potential economic consequences of this conflict under explicit assumptions about monetary and fiscal policy. US unilateral protection emerges as "beggar thy neighbor" policy, by most if new tariff revenue affords capital tax relief. China's proportional losses are large, little mitigated by its retaliation, which nonetheless constrains US net gains. Avoiding leakage by protecting against all sources causes large losses in third regions trading with China and the US. 3 implications. An elemental six-region global macro model is used that captures trade in final and intermediate goods as well as financial flows, with some attention to household heterogeneity, and which makes monetary and fiscal policy responses explicit. Key features of the model include that capital owning households manage global portfolios of variably differentiated regional assets, and monetary policies target inflation in the US, Europe and Japan, as well as in smaller advanced regions like Australia, "anchoring" inflation expectations. In China, on the other hand, we see monetary policy targeting its US exchange rate, creating a mismatch between actual and expected inflation. Two types of solutions are obtained, one under short run assumptions, with varying unemployment levels and fiscal deficits but fixed capital use, and another in which time is allowed for financial flows to redistribute productive capacity across countries, for labor markets to adjust and for fiscal balance to be retained via changes in tax rates or government expenditure. At either length of run trade distortions alter the relativities between consumer, producer and GDP prices, wage rates and capital returns. Since all regions are characterized as "large", unilateral increases in protection by any one region can raise domestic "welfare" at the expense of other regions, though such protection can shrink the volume of its own, and of global, output. We offer several policy scenarios to reflect alternative trajectories of the trade conflict, depending on the actions taken by the US and China and on whether there is further escalation. These include unilateral protection by the US against Chinese imports, protection by the US with bilateral retaliation by China, and the avoidance of leakage via protection against all imports by both the US and China. Several conclusions emerge. First, US real wage rates and welfare more generally are indeed raised by unilateral protection against China, by most when the additional revenue from tariffs affords capital income tax relief but far less substantially if there is retaliation from China or elsewhere. Second, while the economic losses from the trade conflict are comparable across regions outside the US on a "dollars per capita" basis, the losses to China are much larger as a proportion of initial disposable income. This is also true for effects on China's real GDP and its real low-skill wages, suggesting that it has the strongest motive to renegotiate trade arrangements. Third, trade wars can be significantly damaging not only for at least one of the protagonists, but also for third regions, reducing both output and welfare globally. And finally, since trade could leak around new protectionist barriers, if the two protagonists in the conflict Australia China Japan United States France Germany Source: SWIID database. Note: The orange line is Gini index of inequality in equivalized household market (pre-tax and pre-transfer) income. The blue line is Gini index of inequality in "equivalized" household disposable (post-tax and post-transfer) income.
Continued automation and declines in low-skill shares of GDP have been widespread globally and li... more Continued automation and declines in low-skill shares of GDP have been widespread globally and linked to inequality. We examine the long-term, global consequences of policies that foster automation or address the distributional consequences of it, using a six-region global macro model. Results depend on whether welfare criteria are Rawlsian, emphasizing the performance of low-skill households, Benthamite, which aggregate pecuniary measures, capital-owner friendly, or simply based on real GDP. Even where automation delivers only bias against the low skilled, we find that the fostering it is a dominant strategy under all but the Rawlsian criterion. We then consider a post automation scenario in which worker displacement is significant, examining inequalityconstraining but balance-preserving fiscal interventions, such as tax-financed "earned income tax credits". These generate only small international spillover effects and are for the most part not preferred under all criteria except the Rawlsian one.
Proximity to short yield zero lower bounds has challenged the inflation targeting central banks o... more Proximity to short yield zero lower bounds has challenged the inflation targeting central banks of the advanced regions. Central to this development are three-decade declining trends in long yields and underlying real, equilibrium interest rates that have flattened yield curves, restricting "normalisation" and adding deflationary pressure by boosting demand for portfolio money. Inflationary forces, such as fiscal deficits, industrial protection and resurgent regional growth, have proved comparatively weak. In this paper global modelling is used to show that key deflationary forces in these regions include automation, the race to the bottom in capital taxation and immigration. Each is shown to redistribute income so as to expand the welfare gap between the low-skilled and capital owners by 2.5 to 3.5 per cent per year. The high saving rates of capital owners depress real equilibrium rates and their expanding portfolios demand monetary expansion. These forces ensure that the challenges of macro stabilisation and distributional policy making are both intertwined and urgent.
Progress has been made in economic reform under the "Abenomics" first (monetary policy) and secon... more Progress has been made in economic reform under the "Abenomics" first (monetary policy) and second (taxation reform) "arrows". The third, which emphasises structural reforms, has been more politically difficult, thus far yielding mixed results. This paper explores the gains that are possible from the labour market, tax and competition reforms embodied in the third arrow program. Economic rents and industry concentration levels are first identified from Nikkei firm specific data and used to construct an economy-wide model that represents oligopoly behaviour and its regulation explicitly. The analysis finds that modest gains in efficiency are available labour growth and, when it is accompanied by corporate governance reform, the switch between company and consumption taxation. Larger gains are shown to be available from active competition policy and, particularly, from productivity enhancing FDI in services. Central to the results is that a resurgent Japanese economy requires efficiency improvements that raise home rates of return and rebalance its large home and foreign asset portfolio toward home investment and capital growth.
Indonesia fielded shocks due to the Asian financial crisis (AFC) and the global financial crisis ... more Indonesia fielded shocks due to the Asian financial crisis (AFC) and the global financial crisis (GFC) quite differently. Financial contagion, policy misdirection, panic and political upheaval saw the AFC bring economic collapse. The decade-later GFC, however, brought real growth of 6.1% (2008) and 4.5% (2009), amongst the world's best performances at the time. This paper reviews these events and employs numerical modelling of stylized AFC and GFC shocks to show that some of the contrast stems from differences in the shocks and intervening changes in economic structure. Critically, IMF conditionality during the AFC required unsustainably contractionary reforms. Capital flight elements were present in both crises, however, and exchange rate depreciations and money-financed fiscal expansions are shown to have contributed significantly to resolution.
Insights into the international implications of China's entry to the large economy club and the f... more Insights into the international implications of China's entry to the large economy club and the four-region strategic behaviour that results can be derived from applications of the elemental multi-region, macroeconomic simulation model introduced in this paper. It has a global general equilibrium structure that embodies bilateral linkages between represented regions via both trade and investment. Its behaviour is illustrated with an application to monetary policy following a period of deflationary expectations. Unilateral expansions are shown clearly to have negative real implications for the other large economies whose central banks are forced to respond in kind. * Thanks for assistance with the construction of the database for this model go to Ying Zhang and Tsun Se Cheong.
Opinion over the global implications of China's rise is divided between critics, who see it as ha... more Opinion over the global implications of China's rise is divided between critics, who see it as having developed at the expense of both investment and employment in the US, Europe and Japan and proponents who emphasise improvements in the terms of trade and reductions to the cost of financing that stem from China's supply of light manufactures, its demand for Western capital and luxury goods and its high saving. The criticism implies Keynesian assumptions while proponents take a neoclassical perspective. In this paper, both are embodied in a global macro model that emphasises bilateral linkages via both trade and investment, with monetary spill-overs represented by globally integrated bond markets. Net gains are suggested for the US and Europe from China's successful export-oriented growth, though there are partially offsetting Keynesian effects. China's recent slower, more consumption focussed growth appears also to be beneficial in those regions and in Japan notwithstanding terms of trade losses.
Assistance in the early stages of DP0557885 was provided by Lucy Rees, Pingkun Hsu and Marcin Pra... more Assistance in the early stages of DP0557885 was provided by Lucy Rees, Pingkun Hsu and Marcin Pracz, and more recently, by Tsun Se Cheong and David Sami. Finally, all technical analysis for the paper is performed using the Gempack modelling software.
China is transitioning toward more inward-focussed growth, causing adverse changes in the product... more China is transitioning toward more inward-focussed growth, causing adverse changes in the product and financial terms of trade in the advanced economies. At the same time, international financial markets tussle between tightening forces associated with the US recovery on the one hand and unconventional monetary expansion in Europe and Japan on the other. The way these shocks interact is examined in this paper using a global macro model with national portfolio rebalancing and asset differentiation and a representation of unconventional monetary policy. Results are found to be sensitive to the contributions of productivity and capital accumulation to China's growth. When these are offered in realistic combination, the combined shocks are deflationary in the US and China, implying that contractionary US monetary policy is not imminent. Monetary responses in the US and China then combine with price targeting regimes in the EU and Japan to expand liquidity globally, amplifying impacts on financial markets and the global distribution of real investment.
* Funding for the research described in this paper is from Australian Research Council Discovery ... more * Funding for the research described in this paper is from Australian Research Council Discovery Grant No. DP0557885. It was conducted in part during visits to the China Center for Economic Research (CCER) at Peking University. Special thanks are due to Feng LU and Ling HUANG at Peking University for many constructive conversations on the topic and to Peter Dixon, Yew-Kwang NG, James Giesecke, Yuanfang LI, Miaojie YU, Yongxiang BU and to other participants at lively CCER and CoPS seminars. More recently, valuable comments on the latest draft have been received from Ligang SONG and Warwick McKibbin. Research assistance was provided by Pingkun HSU at the ANU, Liu LIU at the CCER and at the UWA Business School by Ying ZHANG and Tsun Se CHEONG.
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