Games and Politics: An Examination of Persistent U.S. – China Financial Imbalances

Games and Politics: An Examination of Persistent U.S. – China Financial Imbalances

Tracy Hofer (School of Business and Economics, College of Professional Studies, University of Wisconsin – Stevens Point, Stevens Point, WI, USA)
DOI: 10.4018/jsesd.2012100102

Abstract

The fact that the U.S. and China have maintained large and persistent financial imbalances is not under dispute. There is disagreement about whether or not these imbalances can be sustained. Within this discussion, much of the literature focuses on the corrective policies required by the U.S. and/or China to eliminate these imbalances, if one considers correction necessary. This paper argues that the appropriate way to model the correction decision for both the U.S. and China is to use a game-theoretic approach. An example is then provided that illustrates how a game-theoretic model can be used to determine the equilibrium policy choices by the U.S. and China under two different assumptions: that the imbalances are sustainable and also under the assumption that the imbalances are unsustainable. Lastly, it is argued that only by utilizing a political economy model, can the choice of policy actions with each country be fully examined, as the policies are undertaken under political constraints in each country.
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U.S. – China Financial Imbalances: Background And History

Beginning in the late 1990s, significant global financial imbalances began to emerge. While these imbalances involve many countries, this paper will focus on the U.S.’s large current account deficits and China’s large current account surpluses. Table 1 shows the current account balances for the U.S. and China as a percent of GDP from 1995 to 2011.

Table 1.
Current account balances as a percent of GDP
ChinaUnited States
19950.222-1.532
19960.846-1.592
19973.88-1.689
19983.087-2.446
19991.446-3.225
20001.712-4.184
20011.314-3.856
20022.436-4.296
20032.796-4.659
20043.554-5.303
20055.942-5.908
20068.581-5.985
200710.128-5.063
20089.124-4.738
20095.23-2.701
20105.148-3.242
20112.754-3.137

Source: IMF, 2012

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