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Sterling implications of a US current account reversal

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  • Morten Spange
  • Pawel Zabczyk

Abstract

This paper investigates the potential implications for sterling of the US current account returning to balance. The analysis is conducted using a three-country model comprising the United Kingdom, the United States and a block that is meant to represent the rest of the world. The main conclusion from our analysis is that the potential implications for sterling of a US current account reversal are highly uncertain - one can derive a wide range of estimates for the potential changes. Estimates of the sterling adjustments are smaller than the implied movements in the dollar and depend heavily on (a) the cause of the US current account adjustment; (b) the assumptions one makes about the associated adjustment of the UK current account deficit; and (c) assumptions about key model parameters.

Suggested Citation

  • Morten Spange & Pawel Zabczyk, 2006. "Sterling implications of a US current account reversal," Bank of England working papers 296, Bank of England.
  • Handle: RePEc:boe:boeewp:296
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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2006/WP296.pdf
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    References listed on IDEAS

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    1. Maurice Obstfeld & Kenneth Rogoff, 2007. "The Unsustainable U.S. Current Account Position Revisited," NBER Chapters,in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 339-376 National Bureau of Economic Research, Inc.
    2. Tille, Cédric, 2008. "Financial integration and the wealth effect of exchange rate fluctuations," Journal of International Economics, Elsevier, vol. 75(2), pages 283-294, July.
    3. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, August.
    4. Cedric 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).
    5. Nicoletta Batini & Brian Jackson & Stephen Nickell, 2002. "The Pricing Behaviour of UK Firms," Discussion Papers 09, Monetary Policy Committee Unit, Bank of England.
    6. Gianluca Benigno & Christoph Thoenissen, 2003. "Equilibrium Exchange Rates and Supply-Side Performance," Economic Journal, Royal Economic Society, vol. 113(486), pages 103-124, March.
    7. Hilary Croke & Steven B. Kamin & Sylvain Leduc, 2005. "Financial market developments and economic activity during current account adjustments in industrial economies," International Finance Discussion Papers 827, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Karen Dury & Özlem Oomen, 2007. "The real exchange rate and quality improvements," Bank of England working papers 320, Bank of England.
    2. Blake, Andrew P & Markovic, Bojan, 2008. "The conduct of global monetary policy and domestic stability," Bank of England working papers 353, Bank of England.
    3. Bojan Markovic & Laura Povoledo, 2011. "Does Asias choice of exchange rate regime affect Europes exposure to US shocks?," Economic Issues Journal Articles, Economic Issues, vol. 16(2), pages 1-38, September.

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