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Sustainable Adjustment of Global Imbalances

Listed author(s):
  • Ray Barrell
  • Dawn Holland
  • Ian Hurst

This paper uses NIESR’s global econometric model, NiGEM, to analyse possible adjustment paths for the US current account, if its current level of 6 per cent of GDP proves unsustainable. Nominal exchange rate shifts have only a transitory impact on current account balances, so any long-term improvement of the US current account balance would require a real and sustained reduction in domestic absorption, or a rise in foreign absorption. This could be effected through a sequence of exchange rate movements driven by a gradual rise in the risk premium on US assets. This would induce a permanent change in the real exchange rate, and would also reduce domestic absorption in the US due to a rise in real interest rates. Global policy coordination, which involved raising domestic demand in countries such as China and Japan, could speed the process of adjustment and ease the negative impact on the US economy.

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Paper provided by CASE-Center for Social and Economic Research in its series CASE Network Studies and Analyses with number 0343.

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Length: 26 Pages
Date of creation: 2007
Handle: RePEc:sec:cnstan:0343
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