Fiscal policy aims at stabilizing an economy through government management of spending and taxes to influence aggregate demand. Fiscal policy works through both automatic stabilizers, based on countercyclical responses of spending and taxation to income fluctuations, and active management, particularly in response to severe negative shocks. Fiscal stimulus is most effective under conditions of either a fixed exchange rate combined with high capital mobility or a floating exchange rate combined with low capital mobility. Use of activist fiscal policy is limited by cumbersome decision-making processes, the countervailing effects of government borrowing on interest and exchange rates, and debt sustainability constraints. Space to run a primary fiscal deficit while holding the debt ratio constant is greater the lower the interest rate and the higher the GDP growth rate. Debt-to-GDP ratios vary greatly across Emerging East Asia, and with that so does capacity to respond to crisis. After running deficits that exceeded the sustainbility threshold for some years, Vietnam managed to put government finances on a sounder footing by the late 2010s.

Monetary policy aims at stabilizing an economy through central bank management of the money supply to influence aggregate demand. Constraints on the policy framework are imposed by the Trilemma which holds that policymakers cannot have all three of: open capital markets; an independent monetary policy; and a pegged exchange rate. Exercise of options varies within the Emerging East Asia region. Hong Kong with its globally integrated financial market pegs its exchange rate to the US dollar giving up discretion over monetary policy. China with its state-dominated economy imposes controls on foreign capital flows allowing separation of monetary and exchange rate policies. Mostly though, the region’s capital markets are open enough that the interest rate and the exchange rate intertwine as instruments of policy. Against external shock, central banks lean against currency volatility, with monetary policy following along. Sterilization of foreign exchange market intervention operates within limited space lest speculative capital flows bet against the central bank. Singapore makes for an interesting case study of exchange rate–based monetary policy.

Macroeconomics is the study of movement in aggregate economic activity. The focus of this text is, in particular, on short-run fluctuations around long-run potential growth. Deviations from potential result in output gaps, either positive, involving overheating, or negative, involving underperformance. For the open economies of Emerging East Asia, shocks to foreign trade and capital flows are a major source of volatility. Stabilization policy aims to keep an economy growing on track with its potential.

This text begins by laying foundations in balance of payments and exchange rates, and in money and finance, tailored to the Emerging East Asia setting. It then presents theories of macroeconomic instability and the business cycle. Discussion of monetary and fiscal policy follows with attention to the coordinated pursuit of internal and external balance. As fitting the Emerging East Asia context, emphasis is on the role of the exchange rate and the constraints imposed on policy by global capital markets and debt sustainability strictures.

Chapter 8 studies the record of macroeconomic and financial crises, high inflation episodes, currency collapses, political crises, and collapses of democracy in Latin America and the financial crises and recession episodes in East Asian economies in the period 1970–2015. The chapter focuses on countries – such as Argentina and Venezuela – with high incidence of growth, inflation, and political crises, and also examines the cases of Chile and Mexico. The chapter examines the effects of the East Asian crisis of 1997–98 on Korea, Indonesia, the Philippines, Thailand, and Malaysia (the Asia-5 countries) and compares its impact on China, Vietnam, Singapore, and Hong Kong. The chapter offers a discussion on a wide variety of crisis and stabilization occurrences in a comparative perspective, highlighting economic and political economy factors.