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International Financial Issues in the Pacific RimGlobal Imbalances, Financial Liberalization, and Exchange Rate Policy$
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Takatoshi Ito and Andrew K. Rose

Print publication date: 2008

Print ISBN-13: 9780226386829

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226387086.001.0001

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Life on the Tri-Polar Sphere

Life on the Tri-Polar Sphere

How Should Interest and Exchange Rates Realign Next?

(p.13) 1 Life on the Tri-Polar Sphere
International Financial Issues in the Pacific Rim
Michael P. Dooley, David Folkerts-Landau, Peter Garber
University of Chicago Press

This chapter sets out in greater detail what the authors think about the dynamic forces emanating from the emergence of China and Asia as major players in world capital and foreign exchange markets. Conventional analyses have been based for several years on the assertion that the Bretton Woods II system cannot hold together for much longer. This may or may not turn out to be correct, but it does not offer any guidance if the system does survive for an extended time period. A framework is developed that also provides a guide to the dynamics of the system following a variety of changes in the economic environment. The analysis leans on four assumptions. (1) Asian financial markets are poorly integrated with the other two regions because of capital controls and the threat of sovereign interference with capital flows. (2) The United States and Euroland financial markets, in contrast, are very well integrated and their respective assets are very close substitutes. (3) The dominant change in the economic environment that is driving the main features of the world economy is the rapid growth of savings rates and the level of savings in Asia and their exportation to the rest of the world. (4) The United States and Euroland differ in their capacities to utilize Asian savings, with the United States having a much greater absorptive capacity.

Keywords:   China, Asia, capital markets, foreign exchange markets, Bretton Woods II system, financial markets, savings rates, United States, Euroland

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