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Sterling implications of a US current account reversal

  • Morten Spange
  • Pawel Zabczyk

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.

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File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2006/WP296.pdf
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Paper provided by Bank of England in its series Bank of England working papers with number 296.

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Date of creation: Jun 2006
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Handle: RePEc:boe:boeewp:296
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  1. Maurice Obstfeld & Kenneth Rogoff, 2005. "The unsustainable U.S. current account position revisited," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
  2. Cedric Tille, 2005. "Financial Integration and the Wealth Effect of Exchange Rate Fluctuations," 2005 Meeting Papers 282, Society for Economic Dynamics.
  3. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, 08.
  4. 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.).
  5. Benigno, Gianluca & Christoph Thoenissen, 2002. "Equilibrium Exchange Rates and Supply Side Performance," Royal Economic Society Annual Conference 2002 19, Royal Economic Society.
  6. 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).
  7. Nicoletta Batini & Brian Jackson & Stephen Nickell, 2002. "The Pricing Behaviour of UK Firms," Discussion Papers 09, Monetary Policy Committee Unit, Bank of England.
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