Domestic Investment and External Imbalances in East Asia

This paper analyzes the post-1997/98 crisis evolution of the East Asian economies, focusing on domestic investment and the consequences of this weak investment on current global account imbalances. The cause of the investment declines and subsequent current account surpluses in East Asia are assessed. Simulations with a global general equilibrium model support the positive role of the investment increase or strong productivity related growth in reducing current account surpluses in East Asia. The author argues that, nevertheless, a fiscal adjustment in the US turns out to be more effective in reducing the US current account deficit and thereby correcting global imbalance.

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