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Implications for the Yen of Japanese Current Account Adjustment

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  • Maurice Obstfeld

    (University of California, Berkeley (E-mail: obstfeld@econ.berkeley.edu))

Abstract

This paper presents a quantitative evaluation of the effect on the yen of some alternative scenarios under which Japan reaches current account balance. The analytical framework is a global general equilibrium model, based closely on Obstfeld and Rogoff (2005a, b), within which relative prices clear the world markets for traded goods as well as the domestic markets for nontraded goods. Depending on assumptions about the critical substitution elasticities underlying the model, the yen could appreciate by as much as 10 percent for each 1 percent of GDP reduction in its current account surplus. The effect would be smaller if substitution elasticities were larger, or if adjustment were accompanied by an expansion of Japanese nontradable output, the latter presumably implied by a return to a more efficient level of labor utilization.

Suggested Citation

  • Maurice Obstfeld, 2006. "Implications for the Yen of Japanese Current Account Adjustment," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 24(S1), pages 27-38, December.
  • Handle: RePEc:ime:imemes:v:24:y:december:i:s1:p:27-38
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    References listed on IDEAS

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    1. Maurice Obstfeld & Kenneth Rogoff, 2007. "The Unsustainable US Current Account Position Revisited," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 339-376, National Bureau of Economic Research, Inc.
    2. Krugman, Paul, 1989. "Differences in income elasticities and trends in real exchange rates," European Economic Review, Elsevier, vol. 33(5), pages 1031-1046, May.
    3. Cédric Tille, 2003. "The impact of exchange rate movements on U.S. foreign debt," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 9(Jan).
    4. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
    5. Alan Greenspan, 2004. "The Evolving U.S. Payments Imbalance and Its Impact on Europe and the Rest of the World," Cato Journal, Cato Journal, Cato Institute, vol. 24(1-2), pages 1-11, Spring/Su.
    6. 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.
    7. Lane, Philip & Milesi-Ferretti, Gian Maria, "undated". "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
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    Cited by:

    1. Makoto Shimizu, 2020. "The Present-Value Model of the Exchange Rate with a Persistently Time-Varying Risk Premium: Evidence from the Dollar-Yen Rate," Open Economies Review, Springer, vol. 31(5), pages 1037-1059, November.
    2. Shimizu, Makoto, 2017. "Effect of net foreign assets on persistency of time-varying risk premium: Evidence from the Dollar-Yen exchange rate," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 255-265.
    3. Beirne, John & Renzhi, Nuobu & Volz, Ulrich, 2021. "Persistent current account imbalances: Are they good or bad for regional and global growth?," Journal of International Money and Finance, Elsevier, vol. 115(C).

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    More about this item

    Keywords

    Current account adjustment; International capital flows; Japanese yen exchange rate;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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