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Chapter 2: Global Imbalances

  • Lars Calmfors
  • Giancarlo Corsetti
  • Seppo Honkapohja
  • John Kay
  • Gilles Saint-Paul
  • Hans-Werner Sinn
  • Jan-Egbert Sturm
  • Xavier Vives

Huge global imbalances have emerged as a result of the massive current account deficits of the US. The US deficit is largely matched by surpluses in Asia, oil-exporting countries and a few European countries. Correction of global imbalances will require substantial depreciation of the US dollar, though the extent of the adjustment cannot be precisely estimated. The correction of global imbalances could lead to a prolonged fall in the external demand for European products as well as to increased competition from US firms. A large enough fall of the dollar could cause substantial negative wealth shocks arising from reductions in the value of Europe’s dollar-denominated assets. The risk of a financial crisis will increase if a large fall in the dollar is accompanied by a drop in US and worldwide output. It would be difficult to deal with such a crisis under the current frameworks for monetary and fiscal policy. The sizeable government budget deficits in some large EU countries imply that fiscal policy may not enjoy the necessary room for manoeuvre in such a situation.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/ZS/ZS-EEAG_Report/zs-eeag-2006/eeag_report_chap2_2006.pdf
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Article provided by CESifo Group Munich in its journal EEAG Report on the European Economy.

Volume (Year): (2006)
Issue (Month): (03)
Pages: 50-67

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Handle: RePEc:ces:eeagre:v::y:2006:i::p:50-67
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  17. Barry Eichengreen & Muge Adalet, 2005. "Current Account Reversals: Always a Problem?," NBER Working Papers 11634, National Bureau of Economic Research, Inc.
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  23. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 67-146.
  24. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?," NBER Working Papers 11541, National Bureau of Economic Research, Inc.
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