Global imbalances

Development Policy26 Sep 2007Ellen Lammers

The July 2007 issue of the journal Economic Policy is devoted to ‘global imbalances and aid’. Four of the papers, by economists Paul Krugman, Jeffrey Frankel, Philip Lane and William Easterly, were prepared for a special economic policy conference held in 2006 to mark the 20th anniversary of the journal.

The site also gives free access to four articles focusing on developments at the European level that analyze the impact of economic theory on policy making over the last 20 years. The authors systematically trace back specific insights and analyses of a number of economists, and examine to what extent they have been incorporated (or not) into European policy making, for example with regard to the international monetary system, the euro and unemployment.

While these analyses will undoubtedly be of interest to economists and those who study the interrelationship between science and policy, the site also provides access to video interviews in which the authors explain the complex issues addressed in their articles for non-economists. The interviews, each 15–25 minutes long, offer insights into the workings of the global monetary system. The interviewees elaborate on ‘global imbalances’, focusing on the fixed exchange rate between the US dollar and the Chinese renminbi. The currencies of these two enormous economies are closely interlinked, creating a risky situation, according to many observers. Paul Krugman warns of the possibility of a sudden devaluation of the US dollar. He describes the ‘remarkably large US trade deficit which mysteriously is being financed’, a situation that cannot be maintained for long. The problem, he says, is that the market is not perfect, because investors only think in the short term, not in terms of ‘long term sustainability’. This will lead to a ‘dollar crisis’, Krugman says, although it is not yet clear whether this crisis will lead to major international macroeconomic problems.