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U.S. External Adjustment: Is It Disorderly? Is It Unique? Will It Disrupt The Rest Of The World?

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  • STEVEN B. KAMIN
  • TREVOR A. REEVE
  • NATHAN SHEETS

Abstract

"This article focuses on the historical experience with U.S. external adjustment, that is, narrowings of the trade deficit. Using data from the past 35 years, we compare economic performance in episodes during which the U.S. trade balance declined against episodes during which it rose. We find that trade balance adjustment has been generally benign: U.S. real gross domestic product growth tended to fall but not to a statistically significant extent; housing construction slumped; inflation generally rose modestly; and although nominal interest rates tended to rise, real interest rates fell. The article then compares these outcomes to those in foreign industrial economies. We find that the economic performance of the United States during periods of external adjustment is remarkably similar to the foreign experience. Finally, we also examine the performance of the foreign industrial economies during the periods when the U.S. trade deficit widened and narrowed. Contrary to concerns that U.S. adjustment will prove injurious to foreign economies, our analysis suggests that the foreign economies fared reasonably well during past periods when the U.S. trade deficit narrowed. "("JEL "F32, F41) Copyright (c) 2009 Western Economic Association International.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Contemporary Economic Policy.

Volume (Year): 27 (2009)
Issue (Month): 2 (04)
Pages: 265-292

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Handle: RePEc:bla:coecpo:v:27:y:2009:i:2:p:265-292

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References

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  1. Christopher Gust & Nathan Sheets, 2007. "The adjustment of global external imbalances: does partial exchange rate pass-through to trade prices matter?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 850, Board of Governors of the Federal Reserve System (U.S.).
  2. Freund, Caroline, 2005. "Current account adjustment in industrial countries," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(8), pages 1278-1298, December.
  3. Gabriele Galati & Guy Debelle, 2005. "Current account adjustment and capital flows," BIS Working Papers 169, Bank for International Settlements.
  4. Hilary Croke & Steven B. Kamin & Sylvain Leduc, 2006. "An Assessment of the Disorderly Adjustment Hypothesis for Industrial Economies," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 9(1), pages 37-61, 05.
  5. Abdelhak S. Senhadji & Claudio E. Montenegro, 1999. "Time Series Analysis of Export Demand Equations: A Cross-Country Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 46(3), pages 2.
  6. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?," NBER Working Papers 11541, National Bureau of Economic Research, Inc.
  7. J. Bradford Jensen & Lori G. Kletzer, 2005. "Tradable Services: Understanding the Scope and Impact of Services Outsourcing," Working Paper Series, Peterson Institute for International Economics WP05-9, Peterson Institute for International Economics.
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Cited by:
  1. Raphael Anton Auer, 2012. "Exchange Rate Pass-Through, Domestic Competition, and Inflation: Evidence from the 2005/08 Revaluation of the Renminbi," Working Papers 2012-01, Swiss National Bank.
  2. Ravi Balakrishnan & Volodymyr Tulin & Tamim Bayoumi, 2007. "Globalization, Gluts, innovation or Irrationality," IMF Working Papers 07/160, International Monetary Fund.

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