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A quantitative analysis of the mechanisms for adjustment of the external deficit of the United States

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  • Francesco Paterno'

    () (Banca d�Italia, Economic Research Department)

Abstract

This work attempts to quantify the size of the adjustment of the United States external imbalance which can arise from a depreciation of the dollar, an adjustment of the Government�s budget in the United States and an acceleration of the technological process in other main advanced economies. The quantitative assessment of the three different mechanisms (each one of them separately considered) is carried out making use of the econometric model of the world economy NiGEM, elaborated by the National Institute of Economic Social Research. The results of the simulations investigating the effects of a depreciation of the US dollar highlight the limited adjustment of the United States external imbalance when associated with this mechanism. The limited size of the adjustment is partly the result of interest rates equal nearly to zero in Japan which restricts the margins of reaction of the Japanese monetary policy to an appreciation of the yen. Simulations studying the hypothesis of an improvement of the Government budget in the United States demonstrate how the adjustment of the external imbalance equals, in the medium run, just one third of the Government�s budget adjustment. The simulations analysing the hypothesis of acceleration of the technological progress in the main advanced economies, other than the United States, show that correction of the United States external imbalance would be limited in the short run but would tend to widen out in the longer term. In the scenario of depreciation of the dollar and in that of acceleration of the technological progress the improvement of the net international investment position of the United States largely exceeds the improvement of the external deficit because of the significant effects of revaluation of the stocks of foreign assets held by the United States.

Suggested Citation

  • Francesco Paterno', 2005. "A quantitative analysis of the mechanisms for adjustment of the external deficit of the United States," Temi di discussione (Economic working papers) 567, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_567_05
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2005/2005-0567/tema_567.pdf
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    More about this item

    Keywords

    disavanzo esterno; posizione netta sull�estero;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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