13  All speeches are available online at www.bankofengland.co.uk/speeches  13  (ii)  Impact on IS curve  The second way in which a shift in market power could potentially influence macro-economic outcomes is through the IS curve. One structural parameter in that relationship is r*, the neutral rate of interest. In the baseline model, the path of r* is determined by the path of shocks to households’ marginal utility of consumption (𝑧) and firms’ TFP (𝑎):  𝑟𝑡∗ = (1 − 𝜌𝑧 )𝑧𝑡 −  1 − 𝜌𝑎 1+𝜑 𝑎 −1 (1 𝜎 𝜎 − 𝛼) + 𝜑 + 𝛼 𝑡  (8)  In steady-state, the equilibrium real rate is determined by household discount rates (determining saving) and firms’ trend productivity growth (determining investment). 𝑟 ∗ = − log 𝛽 + ∆𝑎  (9)  This suggests that, if there is any impact of market power and mark-ups on productivity, this could in turn have an impact on r*. 24  Consistent with that, and taken at face value, there is a positive correlation between  estimates of the US natural rate of interest and (the inverse) of global mark-ups since 1980 (Chart 17). But whether higher mark-ups might in practice have contributed significantly to the global slowdown in investment and productivity, and hence r*, is far from clear.
Perhaps the most important factor that has for several decades sustained the economic success of the emerging Asian economies is its economic flexibility to adjust to the changing conditions in the global environment. This economic flexibility is supported by the high degree of labour and capital mobility within the national economies and the significant investment accorded to education and to infrastructure development. The region has also adopted a pragmatic approach to policy that is not constrained by rigid ideology. In this more recent decade, institutional development, extensive financial reforms, and the adoption of new business models have been an important part of this transformation process. Several of the economies in emerging Asia’s have transformed their production capacity in the manufacturing and services sector to meet the changing demands of the global economy  BIS Review 131/2010  1  and the growing consumer market in Asia. Given the different stages of development and endowment of natural resources in the region, the emerging economies in Asia have also leveraged on their respective distinct comparative advantages. This has resulted in intraregional division of labour and specialisation, and the capacity to undertake the entire spectrum of the supply chain for a wide range of products and services. Part of the economic restructuring has also involved the greater emphasis on domestic demand as an important source of growth. This has involved significant increases in domestic private consumption and investment activities.