Peterson Institute for International Economics Update Newsletter
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PIIE Update Newsletter
November 29, 2012

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  Working Paper 12-23
Overlooked Opportunity: Tradable Business Services, Developing Asia, and Growth

J. Bradford Jensen
  J. Bradford Jensen This working paper argues that developing Asia is overlooking an opportunity for increased growth and development through trade in business services. The region would benefit from liberalizing services trade as it has benefited from liberalizing goods trade. This argument rests on several key findings: Business services are important for growth, developing Asia is relatively under-endowed with business services, many business services are tradable, and developing Asia has relatively high barriers to services trade.

>> Read full working paper [pdf]

  Policy Brief 12-22
Hyperinflations Are Rare, but a Breakup of the Euro Area Could Prompt One

Anders Åslund
  Anders Aslund Hyperinflation—usually 1,000 percent or more a year—occurs only under very special circumstances: in a disorderly breakup of a currency zone; after wars or revolutions, when monetary or fiscal authorities lack control; and when wild populism prevails. Åslund reviews the historical record and shows that hyperinflation does not arise by mistake but because of major dysfunction or mismanagement. Responsible countries with reasonable governance may default, but they do not have hyperinflation. The danger of hyperinflation, therefore, is an irrelevant concern for ordinary monetary policy. However, the fact that collapse of a large currency union with substantial imbalances usually causes hyperinflation raises concerns for the euro area. Large uncleared payments balances have accumulated between the member countries as the private interbank market has stopped functioning. On the one hand, the uncleared balances have grown massively and, on the other, the creditor countries demand that balances be capped, which would mean disruption of the currency zone. It is critical to prevent a disorderly collapse of the euro area at almost any price, and the most obvious measure is vigorous monetary expansion, even more so than at present. There is no historical evidence of monetary easing or even quantitative easing leading to hyperinflation. The second measure should be more rigorous fiscal austerity in the troubled countries.

>> Read full policy brief [pdf]
>> See also: Rosneft Is the Foundation of Putin's State Capitalism

  Working Paper 12-22
Assessing Potential Inflation Consequences of QE after Financial Crises

Samuel Reynard
  Financial crises have been followed by different inflation paths, which are related to monetary policy and money creation by the banking sector during those crises. Accounting for equilibrium changes and non-linearity issues, the empirical relationship between money and subsequent inflation developments has remained stable and similar in crisis and normal times. This analysis can explain why the financial crisis in Argentina in the early 2000s was followed by increasing inflation, whereas Japan experienced deflation in the 1990s and 2000s despite quantitative easing. Current quantitative easing policies should lead to increasing and persistent inflation over the next years.

>> Read full working paper [pdf]

Role Reversal Will Slow Climate Change

Aaditya Mattoo and Arvind Subramanian
  Arvind Subramanian China's new leaders should not ignore one of the biggest external threats to China's long-term development: climate change. Whether it is the shrinking Himalayan glacier and the resulting pressure on water and agriculture, or the threat to coastal cities such as Shanghai, or urban pollution from carbon, China is extremely vulnerable. Worse, this vulnerability risks becoming an inevitability if the West does not act because it believes it has a greater capacity to adapt to climate change. China must therefore prod the reluctant West, especially the United States, to act to prevent climate change. A crucial first step to galvanizing a private sector-led technology revolution is a sustained increase in the price of CO2 emissions (or carbon price). This would make it costly to emit and to consume emissions-intensive goods and services, driving the search for cleaner alternatives. The West must take the lead in this respect because China and other developing countries cannot: Significant emissions cuts would compromise their development goals. Second, China should address US fears that any unilateral carbon price increase would hurt the competitiveness of its energy-intensive industries such as steel, cement, and fertilizer. Third, China should ensure strong and effective intellectual property rights protection for green technology developed anywhere in the world. Fourth, China should use its considerable foreign exchange reserves to finance a global fund for green technology development and dissemination. Both these measures would be a direct contribution to fostering the green technology revolution. And, over time, India and other emerging economies can follow, emulating the Chinese contributions but staggering them in time. The contributions will not be costless for China, but they are an investment that will have a great return.

>> Read full op-ed

Peterson Perspectives Interviews

audio  A US Court Showdown over Argentine Debt
Edwin M. Truman and John Williamson offer differing assessments of a US Federal judge's order to Argentina to pay its debts to "vulture funds" after defaulting a decade ago.

audio  Normal Trade Relations with Russia Clears the House
Anders Åslund analyzes the factors that led to overwhelming approval in the US House of Representatives establishing normal trade relations with Russia but imposing penalties for Russian human rights violations.

audio  Egypt's $4.8 Billion IMF Loan: Could It Affect Gaza?
Arvind Subramanian explains how an IMF loan being negotiated with Egypt could become the United States' best leverage in seeking Cairo's help to stabilize the violent attacks between Israel and Gaza.

audio  Looking Back with Morris Goldstein: Part I
Morris Goldstein, who is retiring from the Peterson Institute, reflects on how he fell into international economics and became enmeshed in the new world of floating exchange rates in the 1970s.

audio  Looking Back with Morris Goldstein: Part II
Morris Goldstein traces the history of recent battles to reform the banking system and the reasons why banks have resisted adjustments needed to avoid another global financial meltdown.

audio  Will China's New Leadership Team Pursue Economic Reform?
Nicholas Borst says that while some economic reformers were left off the team, other members are followers of former President Jiang Zemin and may seek to further liberalize the economy.

audio  Greece Gets More Time to Get It Right
Jacob Funk Kirkegaard explains the complex interplay of European politics behind the move to give Greece more time to reform and straighten out its budget—and why the International Monetary Fund is withholding its blessings.

audio  Is France Too Cautious on Reform?
Nicolas Véron discusses the perhaps overly slow approach to reform and fiscal consolidation of President François Hollande of France, where markets are at least giving him some breathing space.

audio  Obama's Trade Pivot to Europe and Asia
Jeffrey J. Schott notes that discussion on a transatlantic trade pact are picking up even as President Obama travels to Asia on trade, political, and security issues for his second term.

Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea:  Witness to Transformation
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Obama Should Think Globally in Appointing a New SEC Chair

More Jockeying over Greece's Inevitable Haircut

The Socialist Dilemma of François Hollande: To Be Schröder or Zapatero?

Global Financial Reform and Cross-Border Integration: Is Asian Leadership Needed?

A Spate of Recent Positive Events in the Euro Area
  A Legacy of Inland Development

China's Dream Team

China's Leadership Transition and Economic Reform

Paths Toward Rebalancing the Chinese Economy

Is China becoming a Debtors Prison?
  North-South Trade Update 2: May 24th Measures Fallout

North-South Trade Update 1: Wages and Wage Payments at Kaesong

Ambassador Robert King's Report to Congress

Counterfeit Kicks in Pyongyang

Ahn Cheol-soo: Exit and Party Views on North Korea

PIIE Noted in the News and on the Web

William Cline on Argentina's Methods of Tackling Debt
William R. Cline discusses the history of Argentina's debt restructuring and whether Argentina has to, or should, abide by the recent ruling in New York that ordered Argentina to pay $1.3 billion to a group of creditors.

"Think Tank" Radio
Garland Talks To Howard Rosen About Outsourcing
Howard F. Rosen explains the pros and cons of outsourcing to "Think Tank" host Garland Robinette, including how uncertainty over tax policy affects job creation.

Germany Won't Follow with a Downgrade
Following Moody's downgrade of France's credit rating, Jacob Funk Kirkegaard explains to CNBC Asia why Germany's economy is fundamentally stronger than France's economy. Kirkegaard adds that he doesn't see the downgrade of France affecting the outlook for the euro area.

Preview of Our Next Issue

Policy Brief
Updated Estimates of Fundamental Equilibrium Exchange Rates
William R. Cline and John Williamson

In This Issue

Mark Cliffe European Monetary Union: Roads to Survival

Mark Cliffe of the ING Group discusses how a breakup of the euro area can be avoided.

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