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Global rebalancing in a three-country model

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  • Engler, Philipp

Abstract

This paper extends the model of Engler et al. (2007) on the adjustment of the US current account to a three-country world economy. This allows an analysis of the differential impact of a reversal of the US current account on Europe and Asia. In particular, the outcomes under different exchange rate policies are analysed. The main finding is that large factor re-allocations from non-tradables to tradables will be necessary in the US. The direction of factor re-allocation in Asia depends on whether the Bretton-Woods-II regime of unilaterally fixed or manipulated exchange rates in Asia is continued. If this is the case, the tradables sector and the current account surplus will continue to grow even when the US deficit closes. The flip side of this result is that Europe will face a huge real appreciation and an enormous current account deficit. With floating exchange rates worldwide, the impact on Europe will be limited while Asia´s tradables sector will shrink. --

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Bibliographic Info

Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2009/1.

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Date of creation: 2009
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Handle: RePEc:zbw:fubsbe:20091

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

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References

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  1. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "Direct Investment, Rising Real Wages and the Absorption of Excess Labor in the Periphery," NBER Working Papers 10626, National Bureau of Economic Research, Inc.
  2. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 797-818, September.
  3. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege," CEPREMAP Working Papers (Docweb), CEPREMAP 0606, CEPREMAP.
  4. Ricardo J Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An equilibrum model of "global imbalances" and low interest rates," BIS Working Papers 222, Bank for International Settlements.
  5. Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2004. "The US Current Account Deficit and Economic Development: Collateral for a Total Return Swap," NBER Working Papers 10727, National Bureau of Economic Research, Inc.
  6. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research, Working Paper Series, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt0sx02651, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  7. Engler, Philipp & Fidora, Michael & Thimann, Christian, 2007. "External imbalances and the US current account: how supply-side changes affect an exchange rate adjustment," Working Paper Series, European Central Bank 0761, European Central Bank.
  8. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, American Economic Association, vol. 85(1), pages 168-85, March.
  9. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The revived Bretton Woods system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 9(4), pages 307-313.
  10. Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2005. "Savings Gluts and Interest Rates: The Missing Link to Europe," NBER Working Papers 11520, National Bureau of Economic Research, Inc.
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Cited by:
  1. Christoph Zwick, 2013. "Current Account Adjustment in the Euro-Zone: Lessons from a Flexible-Price-Model," Graz Economics Papers, University of Graz, Department of Economics 2013-08, University of Graz, Department of Economics.
  2. Yongzheng Yang, 2011. "Global Rebalancing," IMF Working Papers, International Monetary Fund 11/239, International Monetary Fund.

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