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Postponing Global Adjustment: An Analysis of the Pending Adjustment of Global Imbalances

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  • Edwin M. Truman

    ()
    (Institute for International Economics)

Abstract

Halving the US current account deficit as a share of GDP is likely to impose a burden of $2,350 per capita on the United States, which explains why US policymakers want to postpone adjustment. The rest of the world relies on the economic stimulus of a widening US external deficit, which explains why they are not eager to see global adjustment. The paper examines three scenarios of exchange rate adjustments, calls on the Federal Reserve to take more account of the external deficit in its words and policy actions, and familiarly notes the need for US fiscal adjustment as part of an efficient adjustment process. Complementary policies are required in the rest of the world. The paper discusses the pattern of recent international capital flows and proposes an international reserve diversification standard to remove some of the uncertainty about the management of foreign exchange reserves.

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Bibliographic Info

Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP05-6.

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Date of creation: Jul 2005
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Handle: RePEc:iie:wpaper:wp05-6

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Keywords: Monetary policy; fiscal policy; current account adjustment; open economy macro; central banks and their policies; foreign exchange;

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References

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  1. Maurice Obstfeld & Kenneth Rogoff, 2007. "The Unsustainable U.S. Current Account Position Revisited," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 339-376 National Bureau of Economic Research, Inc.
  2. Olivier Blanchard & Francesco Giavazzi & Filipa Sa, 2005. "The U.S. Current Account and the Dollar," NBER Working Papers 11137, National Bureau of Economic Research, Inc.
  3. Philip Lane & Gian Maria Milesi-Ferreti, 2005. "A Global Perspective on External Positions," Trinity Economics Papers tep16, Trinity College Dublin, Department of Economics.
  4. 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.).
  5. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
  6. David Hauner, 2005. "A Fiscal Price Tag for International Reserves," IMF Working Papers 05/81, International Monetary Fund.
  7. Andrew T. Levin & John H. Rogers & Ralph W. Tryon, 1997. "A guide to FRB/Global," International Finance Discussion Papers 588, Board of Governors of the Federal Reserve System (U.S.).
  8. Hilary Croke & Steven B. Kamin & Sylvain Leduc, 2005. "Financial market developments and economic activity during current account adjustments in industrial economies," International Finance Discussion Papers 827, Board of Governors of the Federal Reserve System (U.S.).
  9. Matthew Higgins & Thomas Klitgaard, 2004. "Reserve accumulation: implications for global capital flows and financial markets," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 10(Sep).
  10. Assaf Razin, 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," NBER Working Papers 4334, National Bureau of Economic Research, Inc.
  11. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
  12. Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 858-885, 06.
  13. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries," NBER Working Papers 10332, National Bureau of Economic Research, Inc.
  14. Gabriele Galati & Guy Debelle, 2005. "Current account adjustment and capital flows," BIS Working Papers 169, Bank for International Settlements.
  15. Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47, July.
  16. Sachs, Jeffrey, 1982. " The Current Account in the Macroeconomic Adjustment Process," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 147-59.
  17. Edwin M. Truman, 2001. "The International Implications of Paying Down the Debt," Policy Briefs PB01-07, Peterson Institute for International Economics.
  18. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
  19. Ben S. Bernanke, 2005. "The global saving glut and the U.S. current account deficit," Speech 77, Board of Governors of the Federal Reserve System (U.S.).
  20. Caroline L. Freund, 2000. "Current account adjustment in industrialized countries," International Finance Discussion Papers 692, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Catherine L. Mann & Katharina Pl├╝ck, 2005. "The US Trade Deficit: A Disaggregated Perspective," Working Paper Series WP05-11, Peterson Institute for International Economics.
  2. Charles Engel & John H. Rogers, 2006. "The U.S. current account deficit and the expected share of world output," International Finance Discussion Papers 856, Board of Governors of the Federal Reserve System (U.S.).
  3. Charles Engel, 2005. "The US Current Account Deficit: A Re-examination of the Role of Private Saving," RBA Research Discussion Papers rdp2005-09, Reserve Bank of Australia.
  4. Edwin M. Truman & Anna Wong, 2006. "The Case for an International Reserve Diversification Standard," Working Paper Series WP06-2, Peterson Institute for International Economics.
  5. Makin, Anthony J. & Narayan, Paresh Kumar, 2013. "Has international borrowing or lending driven Australia's net capital inflow?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 134-143.
  6. Makin, Anthony J. & Narayan, Paresh Kumar, 2008. "Have US external imbalances been determined at home or abroad?," Economic Modelling, Elsevier, vol. 25(3), pages 520-531, May.
  7. Stein, Jerome L., 2007. "United States current account deficits: A stochastic optimal control analysis," Journal of Banking & Finance, Elsevier, vol. 31(5), pages 1321-1350, May.
  8. Cripps, F. & Izurieta, A. & Singh, A., 2011. "Global Imbalances, Under-Consumption and Over-Borrowing: The State of the World Economy and Future Policies," ESRC Centre for Business Research - Working Papers wp419, ESRC Centre for Business Research.
  9. Beth A Simmons, 2006. "The future of central bank cooperation," BIS Working Papers 200, Bank for International Settlements.
  10. Cripps, Francis & Izurieta, Alex & Singh, Ajit, 2011. "Global imbalances, under-consumption and overborrowing: the state of the world economy & future policies," MPRA Paper 39049, University Library of Munich, Germany.
  11. Anders Aslund, 2006. "Russia's Challenges as Chair of the G-8," Policy Briefs PB06-3, Peterson Institute for International Economics.

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