Peterson Institute for International Economics Update Newsletter
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PIIE Update Newsletter
September 19, 2012

"Washington's premier think tank on the global economy"
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Five Myths about the Euro Crisis

C. Fred Bergsten
  C. Fred Bergsten Europe's financial turmoil and the impact it could have on the rest of the world are the overriding focus of international financial markets. To understand Europe's prospects, however, we must debunk several misconceptions that have emerged about the crisis. Critics may say Europe cannot get its act together, but it has actually responded to the crisis with impressive speed, given the challenges it faces. A "Grexit" would serve to strengthen not doom the currency union, as the ensuing wreckage would strongly motivate other debtor countries to avoid the same fate at all costs. Those that bet Germany will never bail out pensioners in debt-ridden countries forget that, given their history, Germans will not run the risk of destroying Europe again. Fears that continued austerity will lead to political takeover by extremists have not come to pass: The political center has held in every debtor country. And as some predict the euro crisis will tank the US economy, the crisis in fact diverts global capital into the dollar, keeping US interest rates low and thus aiding the recovery of housing and consumer demand. Ultimately, Europe's troubles may spark a deeper union—fiscal as well as political—that could protect the continent from similar crises in the future.

>> Read full op-ed

  New Book
Devaluing to Prosperity: Misaligned Currencies and Their Growth Consequences

Surjit S. Bhalla
  Devaluing to Prosperity: Misaligned Currencies and Their Growth Consequences "Hardly anyone on earth could have or would have written this fascinating book. Its combination of scholarly erudition, technical economics, and horse sense is rare enough. Throw in Bhalla's talent with prose and his flair for being an agent provocateur, and you have something truly unique. Read it and learn. Read it and think. Read it and be provoked."
Alan S. Blinder, Professor of Economics and Public Affairs, Princeton University

"Surjit Bhalla makes a profound and important argument about the growth process and the international monetary system. The issues he raises go back to the founding of economics as a discipline, but are immediately relevant to pressing policy issues all over the world. Everyone concerned with the future of the global economy will need to consider Bhalla's extensive arguments. Whether you agree or disagree, this is a very important book."
Lawrence H. Summers, former Director of the White House National Economic
Council and Charles W. Eliot University Professor at
Harvard University's Kennedy School of Government

"Surjit Bhalla presents a highly readable, topical, and provocative analysis of the role of currency misalignments buttressed by extensive empirical analysis. He argues that keeping the currency undervalued helps growth, and the effect is stronger than that of well-functioning institutions, but he also argues that misalignment creates vulnerability in the international system. The IMF must obviously look more closely into these issues in its multilateral surveillance and also in the analysis it does for the G-20."
Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission of India
and first Director of the Independent Evaluation Office,
International Monetary Fund

>> Preview and purchase book online
>> View the release event

  Working Paper
Capital Account Policies and the Real Exchange Rate

Olivier Jeanne
  Olivier Jeanne To what extent did emerging market and developing countries accumulate large amounts of foreign exchange reserves in the 2000s in order to undervalue their currencies? Olivier Jeanne presents a model of how a country can achieve persistent real exchange rate distortions through reserve accumulation and uses it to answer a few questions about undervaluation policies. How can we detect in the data that these policies influence the real exchange rate? Are there limits to the impact of capital account policies on real exchange rates, and how are they determined? If capital account policies can lead to real exchange rate undervaluation, how different are they from trade protectionism? What is the welfare cost from resisting currency appreciation? Jeanne finds that the model explains the link between reserve accumulation and net capital flows as more than a coincidence. In equilibrium, reserve accumulation must reduce net capital inflows by reducing saving (keeping investment constant). Another way of looking at the real undervaluation policy in this model, thus, is that the accumulation of foreign assets induces "forced saving" in the domestic economy. The capital controls prevent the domestic private sector from offsetting the public accumulation of foreign assets by borrowing abroad. The model thus provides a simple explanation for the high saving rate in countries such as China. Jeanne concludes with suggestions on further expansion of the model.

>> Read full working paper
>> See also: Who Needs to Open the Capital Account?

Peterson Perspectives Interviews

audio  Obama Moves Again on China Export Subsidies: How Big an Impact?
Gary Clyde Hufbauer explains the facts supporting the Obama administration's legal action to stop Chinese export subsidies, but he says the impact of winning is likely to be small.

audio  Will Quantitative Easing (QE3) Do the Trick? Part I
Joseph E. Gagnon explains how the latest Federal Reserve action, more robust than many anticipated, is intended to work to boost the housing market.

audio  Will Quantitative Easing (QE3) Do the Trick? Part II
Joseph E. Gagnon says it will take at least six months to see if the latest Federal Reserve action stimulates the economy as hoped, and he assesses the other actions the Fed has announced.

Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea:  Witness to Transformation
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Excessive Reserve Accumulation and International Trade Balances

India Wows with Its Latest Economic Steps

Michael Woodford's Unjustified Skepticism on Portfolio Balance (A Seriously Wonky Rebuttal)

Another Eventful Week in the Euro Area

An East European Perspective on the Euro Crisis
  Urbanization and Economic Growth in China

What China Can Learn from Germany

Is China Becoming More Expensive?

The Trans-Pacific Partnership: Whither China?

Investment Above All
  Abba Eban on the DPRK: The North-South Aid Game

Stephan Haggard on Prospects for Reform on Radio 3 Hong Kong

Nuclear Update: The August 31 Foreign Ministry "Memorandum"

Chinese bling

Fitness Fun with Kim Jong Un

PIIE Noted in the News and on the Web

APEC CEO Interviews: Critical Business Issues
C. Fred Bergsten is featured in PricewaterhouseCoopers' APEC CEO Survey report for his outlook on APEC's regional economic integration.

Can India Catch Up with China?
While promoting his book, Eclipse: Living in the Shadow of China's Economic Dominance, in Hong Kong, Arvind Subramanian discusses why India's projected medium-term growth is being revised downwards.

Expect a Bold Response from the ECB
Jacob Funk Kirkegaard expects the European Central Bank to announce significant new measures to help stem the euro area debt crisis.

Business News Network
German Court Ruling on European Stability Mechanism
Anders Åslund discusses the announcement of German courts ratifying the European Stability Mechanism (ESM), which is designed to act as a new bailout fund for the euro area.

Preview of Our Next Issue

Congressional Testimony
Opportunities for US Exports of Business Services
J. Bradford Jensen
In This Issue

Surjit S. Bhalla Devaluing to Prosperity: Misaligned Currencies and Their Growth Consequences

Surjit Bhalla discusses his new book on how successful development has often been achieved through deliberate currency undervaluation.
Joseph E. Gagnon Global Imbalances and Policy Spillovers: A New Approach at the International Monetary Fund

IMF experts present the Pilot External Sector Report, a new strategy for identifying exchange rate and financial policies that may have harmful effects for global stability.

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