W. Max Corden

Dutch Disease in Australia: Policy Options for a Three‐Speed Economy

This paper expounds the concept of Dutch Disease as it applies currently to Australia, noting the various gains and losses resulting from the Australian mining boom. “Dutch Disease” refers to the adverse effects through real exchange rate appreciation that such a boom can have on various export and import-competing industries. Particular firms or industries may be both gainers and losers. The distinction is made between the Booming Sector (mining), the Lagging Sector (exports not part of the Booming Sector, and import-competing goods and services), and the Non-tradable Sector. The main discussion focuses on policy options, given a floating exchange rate regime. What should the government do – if anything – to reduce or avoid this Dutch “disease”? The principal options are: Do nothing, piecemeal protectionism, and run a fiscal surplus, combined with lowering the interest rate and possibly establishing a Sovereign Wealth Fund. Piecemeal protectionism is likely to be politically popular but there are strong arguments against it. The costs of any measures that successfully moderate real appreciation of the exchange rate and thus Dutch Disease effects are noted, and may be considerable. This is “exchange rate protection”. Gains to some industries are likely to be balanced by losses to others. It is shown, surprisingly, that a fiscal surplus that is financed by taxation of the profits of the Booming Sector may not significantly moderate real appreciation. The reason is that this sector is to a significant extent foreign owned. An issue is whether firms and industries can be clearly divided into those that belong to the Non-tradable Sector and those that belong to the Lagging Sector, the latter being the losers from Dutch Disease. If such a clear distinction cannot usually be made, then the case for “doing nothing” is strengthened.

China's Exchange Rate Policy, Its Current Account Surplus and the Global Imbalances

This article is stimulated by current criticisms of Chinese exchange rate policy. The concern is really about Chinas current account surplus. The article discusses the factors that determine the surplus, and the reasons why the surplus increased sharply from 2005. The international implications of Chinas surplus and growth are discussed, and how it has affected the world real interest rate, and through that the US current account deficit. The surplus has had various international relative price effects, which have produced both gainers and losers. Finally, the surplus played only a small part in determining the world credit crisis.

Those Current Account Imbalances: A Sceptical View

The international current account imbalance, where the United States has a vast deficit and several countries, notably Japan, China, Germany and the oil exporters have corresponding surpluses, is usually seen as a problem. The argument here is that current account imbalances simply indicate intertemporal trade – the exchange of goods and services for claims. There are likely to be gains from trade of that kind as from ordinary trade. What then are the problems? This paper considers several scenarios, notably one where net savings of the surplus countries decline so that the world real interest rate rises, and another where the US fiscal deficit is reduced, so that the world real interest rate falls and there could be a world wide aggregate demand problem, essentially caused by the high net savings of the surplus countries.

The World Credit Crisis: Understanding it, and What to Do

This paper expounds a story in four stages to explain the world credit crisis, namely: (1) too much credit - an international perspective, (2) too much risk - reaction to low real interest rate, (3) the fatal flaw - the new complex financial instruments, and (4) the panic- bank lending dries up. The paper also discusses the relationship of this crisis to the often-expected crisis of the global imbalances, and it outlines various policy implications.

Global Imbalances and the Paradox of Thrift

This paper analyses the relationship between the global imbalances and the financial crisis. The imbalances were connected with the increase in world savings emanating from the ‘savings glut’ countries, notably China. This increase in savings led to a decline in world interest rates, and thus to greater borrowing, especially in the United States. This borrowing was for financing consumption, wars, and unwise rather than fruitful investment, especially in housing. The failure to invest in fruitful investments led to the financial crisis, and thus the decline in US and world-wide aggregate demand. This was the indirect paradox of thrift. It is to be contrasted with Keynes’s paradox of thrift, where the decline in aggregate demand and output would have resulted directly from the rise in world savings. The paper also discusses why there was not more borrowing for fruitful investment, especially in developing countries, hence avoiding the financial crisis. Copyright 2013, Oxford University Press.

How Valid is International Keynesianism

It is often argued that US demand expansion and the US current account deficit have been ‘supporting’ world demand and hence output and employment outside the United States. A country that runs a deficit is said to be making a ‘contribution’ to the world economy while Japan and Germany, with their surpluses, are failing to do so and deserve some reprimand. More generally, even when current accounts stay constant, it is sometimes argued that economic expansion in one country benefits its trading partners by allowing them to expand, this being the so-called ‘locomotive theory’. Similarly, a country that contracts demand is damaging its neighbours. All this is believed to be true even when exchange rates float or are readily adjusted since all the recent discussions have taken place in a floating exchange rate context.

Distinguished Fellow of the Economic Society of Australia, 2005: Peter Lloyd

This paper surveys the writings of Peter Lloyd, one of Australias best-known economists, who has been elected Distinguished Fellow of the Economic Society of Australia. It notes the importance of his work, mostly done jointly with Herbert Grubel, on intra-industry trade, and his extensive contributions to trade theory. In addition there have been many papers on the global trading system and regionalism, and on the Australian and New Zealand economies. It describes his approach to economics and his many professional activities.