Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows.

This volume contains the papers presented at a 1992 NBER conference on the macroeconomic linkages between the global economy and the East Asian and North American countries. The papers, written by eminent Asian and North American economists, are typically empirically oriented and center on four principal themes: the determinants of growth and trading relations, monetary policies in relation to capital controls and the capital account, the impact of exchange rate behavior on industrial structure, and the potential for greater regional integration.

The book opens with a chapter by Helliwell that seeks to explain why standard empirical growth models applied to a cross section of countries fail to capture well the growth experiences of Asian countries. Helliwell finds that the comparative growth of Asian countries is well explained by the degree of openness, capital investment, and the degree of democratization in each country, with the coefficient on the last variable significantly negative. The paper does not devote enough space to analyzing these results and the empirical setup suffers from limited degrees of freedom, so it is difficult to determine the general applicability of these findings.

The next five chapters are devoted to the balance of payments behavior of several Asian countries. Ito focuses on the early 1990s experience of Japan, which enjoyed a rising current account surplus coupled with net inflow of long term capital. He provides some important insights toward understanding official Japanese capital account data and predicts (correctly) that the current account surplus would continue beyond 1992 but the long term capital inflow would be only temporary. Koo and Park compare Korean current account behavior in the 1980s to that of Japan and Taiwan. They find considerable differences, attributing much of these to differences in national macroeconomic policies. In the next chapter, Gee studies the relationship between the exchange rate and trade flows of Taiwan. A useful contribution of this paper is a data appendix presenting price competition indices between Taiwan and various trade partners. Jwa provides detail on measures taken by Korea to liberalize international capital flows and then attempts to compare its capital account openness to that of Japan and Taiwan. McCulloch concludes this set of chapters with a speculative piece on likelihood of an impending capital shortage and the implications of such an event for the East Asian economies. She argues that a world capital shortage could result in an expansion of direct investment capital from the Asian NICs into other Asian locations.

The next four papers analyze various aspects of exchange rate behavior. Wu and Lin find evidence of a cointegrating relationship between Taiwanese industrial production, its exchange rate, money supply and price level. They use this relationship in an error-correction model to try to explain why rapid growth of the Taiwanese money supply in the 1980s did not translate into high inflation. Fukuda develops and then simulates an intertemporal optimizing model to demonstrate how exchange rate cycles can develop endogenously. In an interesting comment to this paper, Wei offers an alternative model of chaotic exchange rate behavior based on the interaction of heterogenous traders in the foreign exchange market. Chen, Schive, and Chu examine structural changes over the 1980s in the export structure of Taiwan, focusing on the role played by fluctuations in the Taiwanese exchange rate in affecting this structure. They find that the export structure is increasingly becoming similar to that of the United States and Japan. They show that human-capital-intensive goods account for an increasing share of Taiwanese exports and attribute at least some of this change to the greater strength of the yen vis a vis the NT dollar in the late 1980s.

The final four chapters are devoted to issues related to trade and exchange rate policy and the prospects for further regional integration. Asako and Ono provide a neat model of the inventory practices of an optimizing firm facing various external trade barriers. Their chief concern is to describe the correlation between exports and inventory accumulation. As is not atypical in such models, they demonstrate that this correlation can be positive or negative depending on the stage of the firm's response to an unexpected change in foreign trade barriers. The next chapter, by Frankel and Wei, examines whether the exchange rate policies of East Asian countries are consistent with the formation of a yen bloc. They find only limited evidence of an increased role of the yen, concluding instead that currency and trade relationships of the East Asian countries conform more closely to a trans-Pacific bloc with the U.S. dollar serving as the center currency. The last two chapters continue on with these themes. Taguchi documents the growing internationalization of the yen. He argues that there is some evidence that the yen could serve as a nominal anchor for Asian countries in a fashion similar to the role played by the deutsche mark in Europe. Goto and Hamada conclude the volume by examining the general economic performance of various East Asian economies in order to assess the likelihood of the formation of a successful economic union. They find a high degree of trade interdependence among the Asian countries, higher even than that found among the countries of the European Union. They also find a sufficient degree of economic integration to argue that a case could be made for the formation of a currency union.

As a whole, this volume is disappointing. Despite containing some useful institutional detail and statistical appendices, there is not much here that is stimulating or new. Scholars who focus on East Asian may find this volume of some interest, but I cannot recommend it to anyone with a general interest in open-economy macroeconomics.

Steven Husted University of Pittsburgh and The Australian National University