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Sources of Macroeconomic Imbalances in the World Economy: A Simulation Approach

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  • Jeffrey D. Sachs
  • Nouriel Roubini

Abstract

This paper uses a global macroeconomic simulation model to identify the factors that have contributed to global trade and financial imbalances in the 1980s. After investigating the properties of monetary and fiscal policies in the model, we examine whether the budgetary shifts in the OECD economies in the 1980s can account for the bulk of trade and exchange rate movements. Our conclusions are mixed. The combination of sharply higher fiscal deficits in the United States and sharply reduced deficits in Japan goes far to explain the movements of the trade balances and exchange rates of the two economies. However, the drop in the dollar vis-a-vis the Yen since late 1985 is not well explained by the model. We also investigate the prospects for a reduction of the U.S. trade deficits if U.S. budget deficits are in fact reduced, as well as the possible role for Japanese monetary and fiscal policies in reducing the trade imbalances of the two countries.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2339.

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Date of creation: Aug 1987
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Publication status: published as Toward a World of Economic Stability, (ed) Yoshio Suzuki and Mitsuaki Okabe University of Tokyo Press: Tokyo, Japan, 1988.
Handle: RePEc:nbr:nberwo:2339

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  1. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Warwick J. McKibbin & Jeffrey Sachs, 1986. "Coordination of Monetary and Fiscal Policies in the OECD," NBER Working Papers 1800, National Bureau of Economic Research, Inc.
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Cited by:
  1. Frenkel, Jacob A & Razin, Assaf, 1987. "Fiscal Policies and the World Economy; An Intertemporal Approach (Cambridge, Mass.: MIT Press, 1987)," MPRA Paper 20438, University Library of Munich, Germany.
  2. Lensink, Robert, 1995. "Foreign exchange constraints and developing countries," Economic Modelling, Elsevier, vol. 12(2), pages 179-191, April.
  3. Ramon Moreno, 1988. "Saving, investment, and the U.S. external balance," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 3-17.
  4. Hsiao-chuan Chang, 2004. "Budget Balance And Trade Balance:Kin Or Strangers. A Case Study Of Taiwan," Department of Economics - Working Papers Series 893, The University of Melbourne.

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