Asia Europe Journal

, Volume 15, Issue 4, pp 445–462 | Cite as

Monetary policy and overinvestment in East Asia and Europe

  • Gunther SchnablEmail author
Original Paper


The paper analyzes the role of monetary policy for cyclical movements of investment and asset markets in East Asia and Europe based on a Mises-Hayek overinvestment framework. It is shown how the gradual global decline of interest rates has triggered wandering overinvestment cycles in Japan, Southeast Asia, and China. Similarly, it is shown how a one-size monetary policy within the European Monetary Union has not preserved the European Monetary Union from idiosyncratic economic development and crisis because of uncoordinated fiscal policies. With monetary policy crisis management being argued to impede financial and economic restructuring, a timely exit from ultra-expansionary monetary policies is recommended for both East Asia and Europe to reconstitute economic stability and growth.

Jel classifications

E52 E58 F42 E63 


  1. Blanchard O, Quah D (1989) The dynamic effects of aggregate demand and supply disturbances. Am Econ Rev 79(4):655–673Google Scholar
  2. Blinder A, Reis R (2005) Understanding the Greenspan Standard. Princeton University Department of Economics Working Papers 88
  3. Caballero R, Hoshi T, Kashyap A (2008) Zombie lending and depressed restructuring in Japan. Am Econ Rev 98(5):1943–1977CrossRefGoogle Scholar
  4. Corsetti G, Paolo P, Nouriel R (1999) Paper tigers? A model of the Asian crisis. Eur Econ Rev 43:1211–1236CrossRefGoogle Scholar
  5. De Grauwe P (2016) The economic of monetary union. Oxford University Press, OxfordGoogle Scholar
  6. Funabashi Y (1989) Managing the dollar: from the Plaza to the Louvre. Institute of International Economics, Washington D.CGoogle Scholar
  7. Galí J (2008) Monetary policy, inflation, and the business cycle. Princeton University Press, PrincetonGoogle Scholar
  8. Gertler P, Hofmann B (2016) Monetary facts revisited. BIS Working Papers 566Google Scholar
  9. Gordon R (2012) Is U.S. economic growth over? Faltering innovation confronts the six headwinds. NBER Working Paper 18315Google Scholar
  10. Hamada K, Horiuchi A (1987) The political economy of the financial market. In: Yamamura K, Yasuba Y (eds) The political economy of Japan, 1st edn. Stanford University Press, Stanford, pp 223–260Google Scholar
  11. Hayek F (1929) Geldtheorie und Konjunkturtheorie. Philosophia Verlag, Salzburg. Reprint 1976Google Scholar
  12. Hayek F (1974) The pretence of knowledge. Nobel Prize in Economics Documents from Nobel Prize CommitteeGoogle Scholar
  13. He F (2016) Dealing with zombie enterprises in China. East Asia Forum (20 November 2016)Google Scholar
  14. Hoffmann A, Schnabl G (2011) A vicious cycle of manias, crises and asymmetric policy responses—an overinvestment view. World Econ 34:382–403CrossRefGoogle Scholar
  15. Krugman P (1998) What happened to Asia? (Accessed 30.9.2012)
  16. Mankiw G (2006) The macroeconomist as scientist and engineer. J Econ Perspect 20(4):29–46CrossRefGoogle Scholar
  17. McKinnon R, Ohno K (1997) Dollar and yen: resolving economic conflict between the United States and Japan. MIT Press, Cambridge, MassachusettsGoogle Scholar
  18. McKinnon R (2013) Exchange rates under the east Asian dollar standard. MIT Press, Cambridge, MassachusettsGoogle Scholar
  19. McKinnon R, Schnabl G (2012) China and its dollar exchange rate. A worldwide stabilizing influence? World Econ 35(6):667–693CrossRefGoogle Scholar
  20. Mises L. (1912) Theorie des Geldes und der Umlaufsmittel. München: Duncker & HumblotGoogle Scholar
  21. Mundell R (1961) A theory of optimum currency areas. Am Econ Rev 51(4):657–665Google Scholar
  22. Peek J, Rosengren E (2005) Unnatural selection: perverse incentives and the misallocation of credit in Japan. Am Econ Rev 95(4):1144–1166CrossRefGoogle Scholar
  23. Romer P (2016) The trouble with macroeconomics. MimeoGoogle Scholar
  24. Schnabl G, Wollmershäuser T (2013) Fiscal divergence and current account imbalances in Europe. CESifo Working Paper 4108Google Scholar
  25. Schnabl G (2017) The failure of ECB monetary policy from a Mises-Hayek perspective. CESifo Working Paper 6388Google Scholar
  26. Schumpeter J (1912) The theory of economic development. Massachusetts, CambridgeGoogle Scholar
  27. Sinn HW, Wollmershäuser T (2012) Target loans, current account balances and capital flows: the ECB’s rescue facility. Int Tax Public Financ 19(4):468–508CrossRefGoogle Scholar
  28. Summers L (2014) U.S. economic prospects: secular stagnation, hysteresis, and the zero lower bound. Bus Econ 49(2):65–73CrossRefGoogle Scholar
  29. Wicksell K (1898 [2005]) Geldzins und Güterpreise. FinanzBuch Verlag, MunichGoogle Scholar
  30. Woodford M (2003) Interest and prices: foundation of a theory of monetary policy. Princeton University Press, PrincetonGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany 2017

Authors and Affiliations

  1. 1.Universität LeipzigLeipzigGermany

Personalised recommendations