ABSTRACT
This chapter focuses on microeconomic changes that should be implemented, leaving the macroeconomic suggestions for later. A major problem for policy-makers is in deciding how to remove sane of the volatility from capital flows without depriving the United States of the benefits derived from them. Direct investment prenotes exports while portfolio investment affects trade through the exchange rate. Increased US holdings of foreign financial assets would cause other currencies to appreciate. Germany, Japan, and the United States all have different policy objectives and all have historical aversions to different economic phenomena such as inflation in West Germany and unemployment in the United States. The best that can be hoped for at present, other than coordinated intervention in the currency markets and an occasional synchronized cut in interest rates, is a series of unilateral actions taken by each of the three countries that together serve to reduce imbalances.
