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Debt Dynamics and Global Imbalances: Some Conventional Views Reconsidered

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  • Guy Meredith
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    Abstract

    We use a general-equilibrium model to explain the rise in global trade and payments imbalances since the mid-1990s, and then to construct adjustment paths to a steady state. Assuming that the shocks giving rise to the imbalances do not suddenly reverse, simulated movements in the U.S. trade deficit and exchange rate are smaller and more gradual than suggested by partial-equilibrium analyses. An important factor reducing the size of the adjustments is a simulated real interest rate on U.S. external liabilities that is below both the interest rate on external assets and the U.S. real economic growth rate. In addition, the adjustment takes place over an extended period without significantly raising the share of U.S. assets in foreign portfolios, in part because depreciation of the dollar requires continued foreign accumulation of U.S. assets just to keep their portfolio share constant.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/4.

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    Length: 54
    Date of creation: 01 Jan 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/4

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    Keywords: Interest rates; Economic growth; Economic models;

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    Cited by:
    1. Gian-Maria Milesi-Ferretti & Philip R. Lane, 2008. "Where Did All the Borrowing Go? A Forensic Analysis of the U.S. External Position," IMF Working Papers 08/28, International Monetary Fund.
    2. John Williamson, 2009. "Exchange Rate Economics," Open Economies Review, Springer, vol. 20(1), pages 123-146, February.
    3. Bracke, Thierry & Schmitz, Martin, 2008. "Channels of international risk-sharing: capital gains versus income flows," Working Paper Series 0938, European Central Bank.
    4. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock, 2008. "Current account sustainability and relative reliability," International Finance Discussion Papers 947, Board of Governors of the Federal Reserve System (U.S.).
    5. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock, 2008. "Current Account Sustainability and Relative Reliability," NBER Working Papers 14295, National Bureau of Economic Research, Inc.

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