Working Paper: NBER ID: w11583
Authors: Hamid Faruqee; Douglas Laxton; Dirk Muir; Paolo Pesenti
Abstract: This paper re-examines the implications, risks, and attendant policies surrounding global rebalancing of current accounts through the lens of a dynamic, multi-region model of the global economy. In the baseline scenario, world macroeconomic imbalances of the early 2000s can be attributed to a combination of six related but distinct tendencies: (i)expansionary U.S. fiscal policy, (ii) declining rate of U.S. private savings, (iii) increased foreign demand for U.S. assets, particularly in Asia, (iv) strong productivity growth in emerging Asia, (v) lagging productivity growth in Japan and the euro area, and (vi) gaining export competitiveness in emerging Asia. The baseline projects stabilizing U.S. public and foreign debt (albeit at higher levels) and a gradual depreciation of the dollar, allowing the U.S. external deficit to gradually move to a sustainable level. An alternative scenario, involving a sudden portfolio reshuffling in the rest of the world, would result in higher U.S. real interest rates, a significantly weaker dollar, with harmful effects on U.S. (and possibly global) growth. More flexible exchange rates in emerging Asia can help reduce variability in both regional output and inflation. Other simulations consider the effects of U.S. fiscal adjustment, as well as growth-enhancing structural reforms in Europe and Japan.
Keywords: global imbalances; current account; fiscal policy; productivity growth; exchange rates
JEL Codes: E66; F32; F47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. fiscal policy (increase in government debt) (E62) | private savings rates (D14) |
| private savings rates (D14) | current account balance (F32) |
| U.S. fiscal policy (increase in government debt) (E62) | current account balance (F32) |
| decline in U.S. private savings (increase in rate of time preference) (D15) | current account deficit (F32) |
| increased foreign demand for U.S. assets (G15) | U.S. net foreign liability position (F30) |
| increased foreign demand for U.S. assets (G15) | current account surplus (F32) |
| strong productivity growth in emerging Asia (O53) | current account surplus (F32) |
| lagging productivity growth in Japan and Euro area (O49) | current account deficits (F32) |
| current account balance (F32) | real exchange rate appreciation (short run) (F31) |
| current account balance (F32) | real exchange rate depreciation (long run) (F31) |