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External imbalances and the US current account: how supply-side changes affect an exchange rate adjustment

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  • Engler, Philipp
  • Fidora, Michael
  • Thimann, Christian

Abstract

The influential work of Obstfeld and Rogoff argues that a closing-up of the US current account deficit involves a large exchange rate adjustment. However, the Obstfeld-Rogoff model works exclusively via demand-side channels and abstracts from possible supply-side changes. We extend the framework to allow for endogenous supply-side changes and show that this fundamentally alters the mechanism of the adjustment process. Allowing for such an extension attenuates quite significantly the implied exchange rate adjustment. The paper also provides some empirical evidence of variations in the supply-side structure and correlations with the exchange rate and the current account. The policy implications are that measures to foster a supply-side reaction would facilitate the external adjustment by alleviating an exclusive reliance on demand and exchange rate changes, with the latter being potentially destabilising for the global financial system. JEL Classification: E2, F32, F41

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0761.

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Date of creation: Jun 2007
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Handle: RePEc:ecb:ecbwps:20070761

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Keywords: dollar adjustment; global imbalances; sectoral adjustment; US current account deficit;

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  1. Mario Marazzi & Nathan Sheets & Robert J. Vigfusson & Jon Faust & Joseph Gagnon & Jaime Marquez & Robert F. Martin & Trevor Reeve & John Rogers, 2005. "Exchange rate pass-through to U.S. import prices: some new evidence," International Finance Discussion Papers 833, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Agnès Bénassy-Quéré & Lionel Fontagné & Horst Raff, 2009. "Exchange-Rate Misalignments in Duopoly: the Case of Airbus and Boeing," Working Papers 2009-10, CEPII research center.
  2. Lucas Papademos, 2007. "The Effects of Globalization on Inflation, Liquidity and Monetary Policy," NBER Chapters, in: International Dimensions of Monetary Policy, pages 593-608 National Bureau of Economic Research, Inc.
  3. Christoph Zwick, 2013. "Current Account Adjustment in the Euro-Zone: Lessons from a Flexible-Price-Model," Graz Economics Papers 2013-08, University of Graz, Department of Economics.
  4. Agustin S. Benetrix & Philip R. Lane, 2009. "Fiscal Shocks and The Sectoral Composition of Output," The Institute for International Integration Studies Discussion Paper Series iiisdp294, IIIS.
  5. Lombardo, Giovanni & Vestin, David, 2008. "Welfare implications of Calvo vs. Rotemberg-pricing assumptions," Economics Letters, Elsevier, vol. 100(2), pages 275-279, August.
  6. Matthieu Bussière & Alexander Chudik & Giulia Sestieri, 2012. "Modelling global trade flows: results from a GVAR model," Globalization and Monetary Policy Institute Working Paper 119, Federal Reserve Bank of Dallas.
  7. Giancarlo Corsetti & Michael P. Devereux & John Hassler & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2011. "Chapter 3: Greece," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 97-125, 02.
  8. Engler, Philipp, 2009. "Global rebalancing in a three-country model," Discussion Papers 2009/1, Free University Berlin, School of Business & Economics.

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