Research

Investors worldwide are closely watching the steep decline in China’s stock market.  The Shanghai Stock Exchange Composite Index is down more than 40% since June 2015.The reason observers are concerned is not because they themselves are invested: China’s stocks are overwhelmingly held by Chinese themselves.  Rather, many are interpreting it as evidence that China’s economy is going down the tubes.China’s growth rate has indeed slowed down and there are plenty of reasons to believe that the slowdown is not just temporary.

My answers to three questions at the start of 2016 (from Chosun Ilbo, leading Korean newspaper):1. How do you analyze the recent US interest hike, and how will it influence the global economy in the coming year?The Fed had telegraphed its decision to raise the interest rate so far in advance and (by December) so clearly, that the policy change was already fully reflected in markets.  For example most of the substantial appreciation of the dollar since 2014 can be attributed to anticipation of the Fed tightening.

In a sort of year-end look back on Prime Minister Abe’s record and on Japan’s current situation, Reuters Japan has asked for action points or policy suggestions regarding economic and foreign policy.  Here are the responses I offered. Economic policyTo address the problems of the Japanese economy, all three arrows of Abenomics are necessary. The monetary arrow was shot well; but a big fiscal arrow was aimed in the wrong direction; and the structural reform arrows have hardly been taken out of the quiver.

Calls for International coordination of macroeconomic policy are back, after a 30-year hiatus.  To some it looks anomalous that the Fed is about to raise interest rates at a time when most major central banks see a need to extend further monetary stimulus.The heyday of coordination in practice was the decade 1978-1987, beginning with a G-7 Summit in Bonn in 1978 and including the Plaza Accord of 1985, of which this year is the 30th Anniversary.  Economists were able to provide a good rationale for coordination based in game theory: because each country’s   policies have spillover effects on its trading partners’ economies, countries can in theory do better when agreeing on a cooperative package of policy adjustments than in the non-cooperative equilibrium where each tries to do the best it can while taking the policies of the others as given.

Now that the TPP text has been released, I have read at least some parts of it in detail.  It seems to me that it does what the negotiators said it does.  There is a lot to like in the way it came out that many of the critics seem not to know about.   I hope that those Democrats who have been fervently opposed to the TPP  -- in particular some of the Massachusetts congressional delegation -- will now consider it with an open mind!I have an op-ed appearing in the  Boston Globe this week, making the case.

The TPP (Trans Pacific Partnership) that was finally agreed among trade negotiators of 12 Pacific countries on October 5 came as a triumph over long odds.  Tremendous political obstacles, domestic and international, had to be overcome over the last five years.  Now each country has to decide whether to ratify the agreement.Many of the issues are commonly framed as “Left” versus “Right."  The unremitting hostility to the negotiations up until now from the Left – often in protest at being kept in the dark regarding the text of the agreement -- has carried two dangers.

September 7, 2015It is tempting to view economic events in China through a single template: the view that they are driven by government intervention because the authorities haven’t learned to let the market operate.  After all, Mao’s portrait still hangs on the wall and the Communist Party still governs.   But the lens of government intervention has led foreign observers to misinterpret some of the most important developments this year in the foreign exchange market and the stock market.  An instance of such misinterpretations is the confused positions of many American congressmen which have helped bring about the opposite of what they really want from China’s exchange rate.

The plunge of China’s stock market that has taken place since June 2015 has received a lot of attention.  All the commentary says not only that the Chinese authorities have taken a variety of artificial measures to try to boost the market on the way down but also that they did the same during the huge run-up in stock prices between mid-2014 and mid-2015, when the Shanghai stock exchange composite index more than doubled.  The finger-wagging implications are that the Chinese authorities, particularly the stock market regulator, have not learned how to let the market operate and that they had only themselves to blame for the bubble in the first place.

President Obama is still pressing the difficult campaign to obtain Trade Promotion Authority and use it to conclude international negotiations -- across one ocean for the Trans Pacific Partnership (TPP), and then across the other ocean for the Transatlantic Trade and Investment Partnership (TTIP). Many in the Congress, particularly many Democrats, insist that the trade agreements must include mechanisms designed to prevent countries from manipulating their currencies for unfair advantage.The President is right.

CAMBRIDGE – America's two political parties rarely agree, but one thing that unites them is their anger about “currency manipulation," especially by China. Perhaps spurred by the recent appreciation of the dollar and the first signs that it is eroding net exports, congressional Democrats and Republicans are once again considering legislation to counter what they view as unfair currency undervaluation. The proposed measures include countervailing duties against imports from offending countries, even though this would conflict with international trade rules.