A larger current account surplus would be optimal

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Unformatted text preview: timately, the problem is one of excessive domestic savings. Merely getting price expectations right, as advocated by some, will not solve the problem. Since the private sector is unwilling, in the presence of substantial excess capacity, to use these savings for productive investment, while the public sector, so far at least, has used them mainly for wasteful construction projects, the optimal solution would clearly seem to be that of investment abroad achieved though a lower exchange rate (Wolf, 2000). A larger current-account surplus would be optimal both for Japan and for the rest of the world. For Japan it would ensure somewhat higher demand in the short run and higher returns for an ageing population in the long run. For the rest of the world it would provide needed savings, thereby raising capital formation and lowering real interest rates. What Britain did in the second half of the nineteenth century, when it also recorded large current account surpluses and vast capital exports, Japan co...
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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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