Prospects for sustained improvement in U.S. external balance: structural change versus policy change
This paper assesses prospects for sustained improvement in the U.S. external balance drawing on both model-based macro analysis and examination of disaggregated data. Most model projections of the future path of U.S. external balance show the recent improvement petering out by the end 1989 or so. Key structural factors leading to the expected future worsening of U. S. external balance are two asymmetries--the "income asymmetry" and the "pass-through asymmetry". That is, asymmetries in the pricing behavior of U.S. exporters and foreign suppliers and asymmetries in the elasticities of U.S. demand for imports and foreign demand for U.S. exports with respect to economic activity. ; However, could projections based on historical relationships be misleading? Have these models ignored important changes in the international environment? Changes in trading partners and composition of trade, in income responsiveness, exchange rate movements and price competitiveness, the net debt position, trade protection, long-term supply response, and model uncertainty are considered. ; Plausible (or sometimes implausible) changes in the historical relationships do not materially change the medium-term outlook for a future deterioration in U.S. external balance. However, model uncertainty suggests that confidence intervals around the point estimates of key parameters are sufficiently large that periods of improvement in U.S. external balance are within the realm of statistical probability; nevertheless, the outlook for sustained improvement remains problematical. ; This suggests that outcomes for growth and the exchange rate different from those assumed in the projections, and which would probably stem from a different configuration of fiscal and monetary policies here and abroad, are likely necessary to put U.S. external balance on a sustainable path.
|Date of creation:||1990|
|Date of revision:|
|Contact details of provider:|| Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551|
Web page: http://www.federalreserve.gov/
More information through EDIRC
|Order Information:||Web: http://www.federalreserve.gov/pubs/ifdp/order.htm|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Paul R. Krugman & Richard E. Baldwin, 1987. "The Persistence of the U.S. Trade Deficit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1), pages 1-56.
- Houthakker, Hendrik S & Magee, Stephen P, 1969. "Income and Price Elasticities in World Trade," The Review of Economics and Statistics, MIT Press, vol. 51(2), pages 111-25, May.
- Ellen E. Meade, 1991.
"Computers and the Trade Deficit: The Case of the Falling Prices,"
in: International Economic Transactions: Issues in Measurement and Empirical Research, pages 61-88
National Bureau of Economic Research, Inc.
- Ellen E. Meade, 1990. "Computers and the trade deficit: the case of the falling prices," International Finance Discussion Papers 378, Board of Governors of the Federal Reserve System (U.S.).
- Joseph E. Gagnon, 1989. "A forward-looking multicountry model: MX3," International Finance Discussion Papers 359, Board of Governors of the Federal Reserve System (U.S.).
- Jaime R. Marquez & Neil R. Ericsson, 1990. "Evaluating the predictive performance of trade-account models," International Finance Discussion Papers 377, Board of Governors of the Federal Reserve System (U.S.).
- Edison, Hali J. & Marquez, Jaime R. & Tryon, Ralph W., 1987. "The structure and properties of the Federal Reserve Board Multicountry Model," Economic Modelling, Elsevier, vol. 4(2), pages 115-315, April.
- Catherine L. Mann, 1986. "Prices, profit margins, and exchange rates," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 366-379.
- David H. Howard, 1989. "The United States as a heavily indebted country," International Finance Discussion Papers 353, Board of Governors of the Federal Reserve System (U.S.).
When requesting a correction, please mention this item's handle: RePEc:fip:fedgif:373. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marlene Vikor)
If references are entirely missing, you can add them using this form.