Macroeconomic stabilization in emerging economies calls for managing both internal and external balance within a policy space constrained by global capital flows and debt sustainability pressures. Emerging East Asia has crafted an approach to meeting this challenge that involves the exchange rate as policy instrument. But while the economics of the system have proven effective, the politics can run afoul of US strictures on "currency manipulation". This is a source of ongoing tension. Viewing East Asian exchange rate policy through the framework of this text, the macroeconomic motivation for the policy behavior is clear. And motivation is determinative for establishing "currency manipulation" under IMF rules. Advantaging exports through a depressed currency is a side effect of, not the motivation for, accumulating foreign reserves to back exchange rate stabilization. A broad pattern of leaning against currency volatility through both buying and selling of foreign exchange is evident in Emerging East Asia. Countries elsewhere would do well to learn from this model.

Chapter 3 studies the impact of World War I and World War II on aggregate economic activity in the countries engaged in these two armed conflicts. The chapter shows a variety of effects (stimulus, slump, economic disintegration) and seeks to explain many contributing factor (including levels of defense spending) in generating these different outcomes. The chapter also examines the causes and consequences of hyperinflation in Austria, Hungary, Germany, Poland, and Soviet Russia in the first half of the 1920s.