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Postponing Global Adjustment: An Analysis of the Pending Adjustment of Global Imbalances

  • Edwin M. Truman

    ()

    (Institute for International Economics)

Halving the US current account deficit as a share of GDP is likely to impose a burden of $2,350 per capita on the United States, which explains why US policymakers want to postpone adjustment. The rest of the world relies on the economic stimulus of a widening US external deficit, which explains why they are not eager to see global adjustment. The paper examines three scenarios of exchange rate adjustments, calls on the Federal Reserve to take more account of the external deficit in its words and policy actions, and familiarly notes the need for US fiscal adjustment as part of an efficient adjustment process. Complementary policies are required in the rest of the world. The paper discusses the pattern of recent international capital flows and proposes an international reserve diversification standard to remove some of the uncertainty about the management of foreign exchange reserves.

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Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP05-6.

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Date of creation: Jul 2005
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Handle: RePEc:iie:wpaper:wp05-6
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  1. Blanchard, Olivier & Giavazzi, Francesco & Sá, Filipa, 2005. "The US Current Account and the Dollar," CEPR Discussion Papers 4888, C.E.P.R. Discussion Papers.
  2. Gabriele Galati & Guy Debelle, 2005. "Current account adjustment and capital flows," BIS Working Papers 169, Bank for International Settlements.
  3. 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.
  4. Caroline L. Freund, 2000. "Current account adjustment in industrialized countries," International Finance Discussion Papers 692, Board of Governors of the Federal Reserve System (U.S.).
  5. Edwin M. Truman, 2001. "The International Implications of Paying Down the Debt," Policy Briefs PB01-07, Peterson Institute for International Economics.
  6. David Hauner, 2006. "A Fiscal Price Tag for International Reserves," International Finance, Wiley Blackwell, vol. 9(2), pages 169-195, 08.
  7. Assaf Razin, 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," NBER Working Papers 4334, National Bureau of Economic Research, Inc.
  8. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  9. Philip R. Lane & Gian Maria Milesi-Ferretti, 2007. "A Global Perspective on External Positions," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 67-102 National Bureau of Economic Research, Inc.
  10. Matthew Higgins & Thomas Klitgaard, 2004. "Reserve accumulation: implications for global capital flows and financial markets," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 10(Sep).
  11. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
  12. Sachs, Jeffrey, 1982. " The Current Account in the Macroeconomic Adjustment Process," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 147-59.
  13. Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47.
  14. Andrew T. Levin & John H. Rogers & Ralph W. Tryon, 1997. "A guide to FRB/Global," International Finance Discussion Papers 588, Board of Governors of the Federal Reserve System (U.S.).
  15. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
  16. 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.).
  17. Ben S. Bernanke, 2005. "The global saving glut and the U.S. current account deficit," Speech 77, Board of Governors of the Federal Reserve System (U.S.).
  18. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries," NBER Working Papers 10332, National Bureau of Economic Research, Inc.
  19. Mario Marazzi & Nathan Sheets & Robert J. Vigfusson & Jon Faust & Joseph Gagnon & Jaime Marquez & Robert F. Martin & Trevor Reeve & John Rogers, 2005. "Exchange rate pass-through to U.S. import prices: some new evidence," International Finance Discussion Papers 833, Board of Governors of the Federal Reserve System (U.S.).
  20. Thomas Laubach, 2003. "New evidence on the interest rate effects of budget deficits and debt," Finance and Economics Discussion Series 2003-12, Board of Governors of the Federal Reserve System (U.S.).
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