Anthony John Makin

Global Finance and the Macroeconomy

This book provides new ways of analyzing the key issues in international finance and open economy macroeconomics. The topics covered include: financial globalization and the evolution of the international financial system; international macroeconomic accounting and measurement; early balance of payments approaches; the intertemporal model of international borrowing and lending; the significance of external deficits; the determinants of interest rate differentials and exchange rates; the effectiveness of monetary and fiscal policies; capital mobility and economic growth; and the causes of financial crisis in emerging economies.

Does China's Huge External Surplus Imply an Undervalued Renminbi?

A pegged exchange rate regime has been pivotal to Chinas export-led development strategy. However, its huge trade surpluses and massive build up of international reserves have been matched by large deficits for major trading partners, creating acute policy concerns abroad, especially in the USA. This paper provides a straightforward conceptual framework for interpreting the effect of Chinas exchange rate policy on its own trade balance and that of trading partners in the context of discrepant economic growth rates. It shows how pegging the exchange rate when output is outstripping expenditure induces Chinas trade surpluses and counterpart deficits for its trading partners. An important corollary is that given its strictly regulated capital account, Chinas persistently large surpluses imply a significantly undervalued renminbi, which should gradually become more flexible.

Targeting Australia’s Current Account: A New Mercantilism?*

This paper questions some widespread concerns about Australia’s current account deficit, including the level of absorption and external debt. Influences on the external accounts which lie beyond effective policy control in the short run, viz. the terms of trade and the “valuation” effect of earlier depreciations, are shown to have been the main factors widening the deficit over recent years. With the terms of trade fluctuating sharply, the exchange rate should be allowed to float more freely to bring about the necessary restructuring of the economy. A macroeconomic policy response directed toward the current account imbalance per se is reminiscent of mercantilism and seems misplaced in the light of Australia’s dependence on capital imports. “… the mechanism of foreign trade is self adjusting and attempts to interfere with it are not only futile, but greatly impoverish those who practise them …” [Keynes (1936) p.333].

Global imbalances, exchange rates and stabilization policy

This book analyzes key international monetary issues from a macro-foundations perspective. It proposes novel frameworks, mainly diagrammatic, to interpret macroeconomic and financial linkages for globally integrated economies, examining global imbalances, exchange rates, interest rates, international capital flows, inflation, foreign and public debt, as well as the effectiveness of macroeconomic policy under different exchange rate regimes. The work relies heavily on much-neglected economy-wide relations, such as the output-absorption distinction and traditional flow-of-funds analysis, to derive a range of new results.

The Inflexible Yuan and Global Imbalances

This paper evaluates Chinas exchange rate policy and current account surplus in the context of its rapid development. Recognizing that external imbalances reflect divergent national production and expenditure growth within both China and its trading partners, it contends that yuan exchange rate undervaluation against major currencies is central to any explanation of global imbalances. This misalignment artificially assists Chinas output growth and limits its household consumption, thereby slowing the rise in Chinas living standards. Meanwhile, due to currency misalignment, Chinas industrialized trading partners, most notably the United States and European Union, simultaneously experience larger bilateral current account deficits with China, lower output, lower saving and higher investment than otherwise. Further significant appreciation of Chinas exchange rate would simultaneously reduce Chinas huge trade surplus and the bilateral deficits of its trading partners, thereby alleviating international trade tensions.

The Dynamic Effects of Fiscal Stimulus in a Two-Sector Open Economy

In 2009/10 governments around the world implemented unprecedented fiscal stimulus in order to counter the impact of the Global Financial Crisis of 2008/09. This paper analyzes the impact of fiscal stimulus using a dynamic open economy, overlapping generations model that allows for feedback effects of fiscal stimulus on private sector expenditure via changes in the tax rate and the interest rate. There are two types of goods — traded (T) and nontraded (N) goods — which differ in their capital intensities. The main qualitative result is that the dynamic output gains from fiscal stimulus depend on the productivity of the initial stimulus spending, on the speed of repayment of debt, on the sensitivities of the interest rate to government debt and of labor supply to the tax rate. Also, the overlapping generations framework allows an intergenerational welfare analysis. Among the biggest winners from stimulus are those about to retire. The biggest losers are those near the start of their working lives when the stimulus is implemented.

The policy (in)effectiveness of government spending in a dependent economy

This paper analyses the policy effectiveness of government spending in a two-sector open economy whose output and expenditure is comprised of tradables and non-tradables. This framework reveals that government spending on either tradables or, more normally, on non-tradables widens the external deficit, yet how the real exchange rate behaves depends, in the first instance, on in which sector the public spending occurs. It also shows that, irrespective of where government spending falls, there appears to be no significant short run boost to overall output and hence employment a priori, although empirically actual impact would depend on the elasticities of tradable and non-tradable output with respect to the real exchange rate. Furthermore, fiscal stimulus is shown to be unambiguously ineffective if deemed unsustainable by foreign lenders, or implemented under a fixed exchange rate regime with limited capital mobility.

New measures of factor productivity in Australia: a Sato approach

This article derives new results of the Elasticity of Substitution (ES) between capital and labour and factor productivity for Australia, an economy which experienced major economic reform that substantially increased the flexibility of its labour, product and capital markets throughout the 1980s and 1990s. It employs a Sato production function specification which has unique properties that enable the estimation of capital–labour substitution elasticity and changing marginal productivities through time. These estimates reveal that the substitution elasticity and labour productivity in Australia rose significantly from the mid-1960s and remained elevated during the economic reform period. A novel contribution of this article is the depiction of Australias production isoquants to convey how combining labour and capital to produce real Gross Domestic Product (GDP) has changed over recent decades.

The Contribution of Foreign Borrowing to the New Zealand Economy

New Zealands persistent current account deficits and high external debt level remain central to ongoing economic policy debate. However, what is often overlooked is the potentially positive macroeconomic contribution made by foreign finance. This paper suggests that foreign capital inflows, the counterpart of current account deficits, have in fact made a significant contribution to New Zealand national income from a growth accounting perspective. A stylised national balance sheet that includes New Zealands assets and foreign liabilities also places the stock of foreign debt in proper context and reveals that national wealth gains have been significant as well.

RE-EXAMINING THE EFFECTIVENESS OF STABILISATION POLICY

This paper develops an alternative international macroeconomic model for evaluating the effectiveness of fiscal and monetary policy in stabilising national income under fixed and floating exchange rates. It encompasses national output and income, saving, investment, money and capital flows and linkages between the exchange rate, price levels and real interest rates consistent with international parity conditions. It demonstrates that the nature of government spending is pivotal to the effectiveness of fiscal policy, revealing that, ceteris paribus, higher public consumption expenditure contracts national income and depreciates the exchange rate, whereas higher productive public investment spending has opposite effects. The framework also shows that the effectiveness of fiscal and monetary policy as macroeconomic policy instruments is not ultimately dependent on the exchange rate regime. Copyright 2007 The Author Journal compilation 2007 Blackwell Publishing Ltd/ University of Adelaide and Flinders University .