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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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Keywords: savings rate; exchange rate policy;

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  1. Chinn, Menzie, 2002. "Incomes, Exchange Rates and the U.S. Trade Deficit, Once Again," Center for Global, International and Regional Studies, Working Paper Series qt0tc442fc, Center for Global, International and Regional Studies, UC Santa Cruz.
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  15. repec:cdl:ciders:43847 is not listed on IDEAS
  16. David F. Bradford, 1993. "Market Value Vs. Financial Accounting Measures of National Saving," NBER Working Papers 2906, National Bureau of Economic Research, Inc.
  17. Jonathan David Ostry & Atish R. Ghosh & Karl Friedrich Habermeier & Marcos Chamon & Mahvash Saeed Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows," IMF Staff Position Notes 2010/04, International Monetary Fund.
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