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  • Author: Arvind Subramanian
  • Publication Date: 09-2011
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Against the backdrop of the recent financial crisis and the ongoing rapid changes in the world economy, the fate of the dollar as the premier international reserve currency is under scrutiny. This paper attempts to answer whether the Chinese renminbi will eclipse the dollar, what will be the timing of, and the prerequisites for this transition, and which of the two countries controls the outcome. The key finding, based on analyzing the last 110 years, is that the size of an economy—measured not just in terms of GDP but also trade and the strength of the external financial position—is the key fundamental correlate of reserve currency status. Further, the conventional view that sterling persisted well beyond the strength of the UK economy is overstated. Although the United States overtook the United Kingdom in terms of GDP in the 1870s, it became dominant in a broader sense encompassing trade and finance only at the end of World War I. And since the dollar overtook sterling in the mid-1920s, the lag between currency dominance and economic dominance was about 10 years rather than the 60-plus years traditionally believed. Applying these findings to the current context suggests that the renminbi could become the premier reserve currency by the end of this decade, or early next decade. But China needs to fulfill a number of conditions—making the reniminbi convertible and opening up its financial system to create deep and liquid markets—to realize renminbi preeminence. China seems to be moving steadily in that direction, and renminbi convertibility will proceed apace not least because it offers China's policymakers a political exit out of its mercantilist growth strategy. The United States cannot in any serious way prevent China from moving in that direction.
  • Topic: Economics, Markets, Monetary Policy
  • Political Geography: United States, China
  • Author: Trevor Houser, Jason Selfe
  • Publication Date: 11-2011
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: At the United Nations climate change conference in Copenhagen in 2009 and Cancun in 2010, the United States joined other developed countries in pledging to mobilize $100 billion in public and private sector funding to help developing countries reduce greenhouse gas emissions and adapt to a warmer world. With a challenging US fiscal outlook and the failure of cap-and-trade legislation in the US Congress, America's ability to meet this pledge is increasingly in doubt. This paper identifies, quantifies, and assesses the politics of a range of potential US sources of climate finance. It finds that raising new public funds for climate finance will be extremely challenging in the current fiscal environment and that many of the politically attractive alternatives are not realistically available absent a domestic cap-and-trade program or other regime for pricing carbon. Washington's best hope is to use limited public funds to leverage private sector investment through bilateral credit agencies and multilateral development banks.
  • Topic: Climate Change, Development, Economics, Energy Policy, Politics, Foreign Direct Investment
  • Political Geography: United States, America, Washington, United Nations
  • Author: J. Bradford Jensen, Andrew B. Bernard, Peter K. Schott, Stephen J. Redding
  • Publication Date: 06-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: International trade models typically assume that producers in one country trade directly with final consumers in another. In reality, of course, trade can involve long chains of potentially independent actors who move goods through wholesale and retail distribution networks. These networks likely affect the magnitude and nature of trade frictions and hence both the pattern of trade and its welfare gains. To promote further understanding of the means by which goods move across borders, this paper examines the extent to which US exports and imports flow through wholesalers and retailers versus producing and consuming firms.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: Robert Z. Lawrence, Lawrence Edwards
  • Publication Date: 06-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Conventional trade theory, which combines the Heckscher-Ohlin theory and the Stolper-Samuelson theorem, implies that expanded trade between developed and developing countries will increase wage equality in the former. This theory is widely applied. It serves as the basis for estimating the impact of trade on wages using two-sector simulation models and the net factor content of trade. It leads naturally to the presumption that the rapid growth and declining relative prices of US manufactured imports from developing countries since the 1990s have been a powerful source of increased US wage inequality.
  • Topic: Economics, Political Theory, Labor Issues
  • Political Geography: United States
  • Author: Adam S. Posen
  • Publication Date: 06-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Japan's Great Recession was the result of a series of macroeconomic and financial policy mistakes. Thus, it was largely avoidable once the initial shock from the bubble bursting had passed. The aberration in Japan's recession was not the behaviour of growth, which is best seen as a series of recoveries aborted by policy errors. Rather, the surprise was the persistent steadiness of limited deflation, even after recovery took place. This is a more fundamental challenge to our basic macroeconomic understanding than is commonly recognized. The UK and US economies are at low risk of having recurrent recessions through macroeconomic policy mistakes—but deflation itself cannot be ruled out. The United Kingdom worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had. Also, Japan did not face poor prospects for external demand and the need to reallocate productive resources across export sectors during its Great Recession. Many economies do now face this challenge simultaneously, which may limit the pace of, and their share in, the global recovery.
  • Topic: Economics, Markets, Monetary Policy, Financial Crisis
  • Political Geography: United States, Japan, United Kingdom
  • Author: J. Bradford Jensen, Andrew B. Bernard, Peter K. Schott, Stephen J. Redding
  • Publication Date: 05-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Recent research in international trade emphasizes the importance of firms' extensive margins for understanding overall patterns of trade as well as how firms respond to specific events such as trade liberalization. In this paper, we use detailed US trade statistics to provide a broad overview of how the margins of trade contribute to variation in US imports and exports across trading partners, types of trade (i.e., arm's length versus related party) and both short and long time horizons. Among other results, we highlight the differential behavior of related-party and arm's-length trade in response to the 1997 Asian financial crisis.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: J. Bradford Jensen, Andrew B. Bernard, Peter K. Schott, Stephen J. Redding
  • Publication Date: 05-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This paper examines the determinants of intra-firm trade in US imports using detailed country-product data. We create a new measure of product contractibility based on the degree of intermediation in international trade for the product. We find important roles for the interaction of country and product characteristics in determining intra-firm trade shares. Intra-firm trade is high for products with low levels of contractibility sourced from countries with weak governance, for skill-intensive products from skill-scarce countries, and for capital-intensive products from capital-abundant countries.
  • Topic: Economics, Industrial Policy, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: Olivier Jeanne, Anton Korinek
  • Publication Date: 09-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: We study a dynamic model in which the interaction between debt accumulation and asset prices magnifies credit booms and busts. We find that borrowers do not internalize these feedback effects and therefore suffer from excessively large booms and busts in both credit flows and asset prices. We show that a Pigouvian tax on borrowing may induce borrowers to internalize these externalities and increase welfare. We calibrate the model with reference to (1) the US small and medium-sized enterprise sector and (2) the household sector and find the optimal tax to be countercy - clical in both cases, dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms.
  • Topic: Debt, Economics, Global Recession, Financial Crisis
  • Political Geography: United States
  • Author: Gary Clyde Hufbauer, Jared C. Woollacott
  • Publication Date: 12-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This study covers the history of Sino-US trade relations with a particular focus on the past decade, during which time each has been a member of the World Trade Organization (WTO). Providing a brief history of 19th and 20th century economic relations, this paper examines in detail the trade disputes that have arisen between China and the United States over the past decade, giving dollar estimates for the trade flows at issue. Each country has partaken in their share of protectionist measures, however, US measures have been characteristically defensive, protecting declining industries, while Chinese measures have been characteristically offensive, promoting nascent industries. We also cover administrative and legislation actions within each country that have yet to be the subject of formal complaint at the WTO. This includes an original and comprehensive quantitative summary of US Section 337 intellectual property rights cases. While we view the frictions in Sino-US trade a logical consequence of the rapid increase in flows between the two countries, we caution that each country work within the WTO framework and respect any adverse decisions it delivers so that a protracted protectionist conflict does not emerge. We see the current currency battle as one potential catalyst for such conflict if US and Chinese policymakers fail to manage it judiciously.
  • Topic: Economics, International Trade and Finance, Markets, Bilateral Relations
  • Political Geography: United States, China
  • Author: Mohsin S. Khan
  • Publication Date: 04-2009
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: The creation of a monetary union has been the primary objective of the Gulf Cooperation Council (GCC) members since the early 1980s. Significant progress has already been made in regional economic integration: The GCC countries have largely unrestricted intraregional mobility of goods, labor, and capital; regulation of the banking sector is being harmonized; and in 2008 the countries established a common market. Further, most of the convergence criteria established for entry into a monetary union have already been achieved. In establishing a monetary union, however, the GCC countries must decide on the exchange rate regime for the single currency. The countries' use of a US dollar peg as an external anchor for monetary policy has so far served them well, but rising inflation and differing economic cycles from the United States in recent years have raised the question of whether the dollar peg remains the best policy.
  • Topic: Economics, Foreign Exchange, Regional Cooperation
  • Political Geography: United States