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Rebalancing the US Economy in a Postcrisis World

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  • Barry Bosworth

    (Asian Development Bank Institute)

  • Susan M. Collins

Abstract

The objective of this paper is to explore how the external balance of the United States (US) might evolve in future years as the economy emerges from the recession. We examine the issue from the domestic perspective of the saving and investment balance and from the external side in terms of the basic determinants of exports and imports and the role of the real exchange rate. Using these two respective perspectives, we highlight (1) causes and consequences of low private and public saving in the US, and (2) sensitivity of trade to variations in the real exchange rate. We highlight the need for sustained depreciation of the dollar to improve the competitiveness of US exports and argue that the current exchange rate is consistent with a significant reduction in the size of the trade deficit. However, the favorable external outlook is very inconsistent with a projected domestic situation of low rates of private saving and a very large public sector budget deficit matched by a cyclically depressed rate of investment. Changes in US corporate tax structure, reconsideration of capital controls, and perhaps some further decline in the level of real exchange rates could help soften the impact of a potentially very hard postrecession landing for the United States.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Trade Working Papers with number 21877.

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Date of creation: Jan 2010
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Handle: RePEc:eab:tradew:21877

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Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
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Keywords: savings rate; exchange rate policy;

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  1. Menzie D. Chinn, 2004. "Incomes, Exchange Rates and the US Trade Deficit, Once Again," International Finance, Wiley Blackwell, vol. 7(3), pages 451-469, December.
  2. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "International Financial Adjustment," CEPR Discussion Papers 4923, C.E.P.R. Discussion Papers.
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  8. Gary Clyde Hufbauer & Jeffrey J. Schott & Woan Foong Wong, 2010. "Figuring Out the Doha Round," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa91, 1st quart.
  9. Eisner, Robert, 1991. "The Real Rate of U.S. National Saving," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 37(1), pages 15-32, March.
  10. Leonardo Bartolini & Amartya Lahiri, 2006. "Twin deficits, twenty years later," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Oct.
  11. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Papers 13882, National Bureau of Economic Research, Inc.
  12. Robert E. Lipsey & Helen Stone Tice, 1989. "The Measurement of Saving, Investment, and Wealth," NBER Books, National Bureau of Economic Research, Inc, number lips89-1, October.
  13. Stephen G. Cecchetti & Marion Kohler & Christian Upper, 2009. "Financial Crises and Economic Activity," NBER Working Papers 15379, National Bureau of Economic Research, Inc.
  14. David F. Bradford, 1993. "Market Value Vs. Financial Accounting Measures of National Saving," NBER Working Papers 2906, National Bureau of Economic Research, Inc.
  15. Jonathan David Ostry & Mahvash Saeed Qureshi & Karl Friedrich Habermeier & Dennis B. S. Reinhardt & Marcos Chamon & Atish R. Ghosh, 2010. "Capital Inflows: The Role of Controls," IMF Staff Position Notes 2010/04, International Monetary Fund.
  16. Houthakker, Hendrik S & Magee, Stephen P, 1969. "Income and Price Elasticities in World Trade," The Review of Economics and Statistics, MIT Press, vol. 51(2), pages 111-25, May.
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