7 7 yet japan could be facing an even more serious

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Unformatted text preview: ast (Posen, 1998), to have been largely saved in an almost neo-Ricardian response to the vision of ever-mounting publicsector debt.7 7 Yet, Japan could be facing an even more serious structural problem. The increases that were recorded in both external surpluses and public deficits may still have fallen short of what was required to absorb the ‘excess’ savings that the country was generating, given the weakness of private investment. In other words, the Japan of the last decade could be a living example of Keynes’s ‘paradox of thrift’—a country in which desired (or ex-ante) savings exceed planned (or ex-ante) investments by the private sector. In a closed economy without government, the disequilibrium created by such an imbalance is resolved by either a decline in the real interest rate and/or a fall in the level of national income. In an open economy, the real interest rate decline is, in theory at least, no longer possible, but excess savings can be channelled abroad in the form of an export surplus. If, however, the real exchange rate is not allowed to decline to generate this surplus, because of resistance in the rest of the world, then ex...
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This note was uploaded on 02/03/2014 for the course ECON 204 taught by Professor Devero during the Summer '13 term at American University of Sharjah.

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