Ultra-Low Interest Rates, Overinvestment, and Growth in Emerging East Asia
Schnabl, Gunther | March 2017
Abstract
The paper explores business cycles and growth dynamics in emerging East Asia within an ultra-low interest rate environment from the perspective of the monetary overinvestment theories of Mises and Hayek. It argues that, given a low interest rate environment in the large industrialized countries, the likelihood of overinvestment and therefore a crisis in emerging East Asia has increased independently from the exchange rate regime. Overinvestment can take the form of unsustainable booms on stock and real estate markets (as in Southeast Asia prior to the Asian crisis) or the misallocation of funds due to subsidized state-directed capital allocation (as is currently occurring in the People’s Republic of China). If further credit expansion counteracts a crisis triggered by a preceding overinvestment boom, it paralyzes growth in the long term, as Japan experienced.
Citation
Schnabl, Gunther. 2017. Ultra-Low Interest Rates, Overinvestment, and Growth in Emerging East Asia. © Asian Development Bank Institute. http://hdl.handle.net/11540/7714.Keywords
International Financial Market
Multilateral Financial Institutions
Economic Recession
Market
Crisis
Economic indicators
Growth models
Gross domestic product
Macroeconomics
Economic forecast
Financial Stability
Financial Management System
Financial Restructuring
Capital Market Development
Market Development
Economics
Erosion
International Economics
Macroeconomic
Macroeconomic Analysis
Performance Evaluation
Impact Evaluation
Foreign and Domestic Financing
Foreign Direct Investment
Business recessions
Multilateral development banks
Regulatory reform
Capital
Exports
Economic development projects
Economic policy
Economic forecasting
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