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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. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
  2. Sachs, Jeffrey, 1982. " The Current Account in the Macroeconomic Adjustment Process," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 147-59.
  3. 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.).
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  8. Assaf Razin, 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," NBER Working Papers 4334, National Bureau of Economic Research, Inc.
  9. Guy Debelle & Gabriele Galati, 2007. "Current Account Adjustment and Capital Flows," Review of International Economics, Wiley Blackwell, vol. 15(5), pages 989-1013, November.
  10. Olivier Blanchard & Francesco Giavazzi & Filipa Sa, 2005. "The U.S. Current Account and the Dollar," NBER Working Papers 11137, National Bureau of Economic Research, Inc.
  11. Philip Lane & Gian Maria Milesi-Ferretti, 2005. "A Global Perspective on External Positions," The Institute for International Integration Studies Discussion Paper Series iiisdp079, IIIS.
  12. 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.).
  13. 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.
  14. 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.).
  15. 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.).
  16. Edwin M. Truman, 2001. "The International Implications of Paying Down the Debt," Policy Briefs PB01-07, Peterson Institute for International Economics.
  17. 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.).
  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. 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.).
  20. Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47, May.
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