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Global rebalancing in a three-country model

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  • Engler, Philipp

Abstract

This paper extends the model of Engler et al. (2007) on the adjustment of the US current account to a three-country world economy. This allows an analysis of the differential impact of a reversal of the US current account on Europe and Asia. In particular, the outcomes under different exchange rate policies are analysed. The main finding is that large factor re-allocations from non-tradables to tradables will be necessary in the US. The direction of factor re-allocation in Asia depends on whether the Bretton-Woods-II regime of unilaterally fixed or manipulated exchange rates in Asia is continued. If this is the case, the tradables sector and the current account surplus will continue to grow even when the US deficit closes. The flip side of this result is that Europe will face a huge real appreciation and an enormous current account deficit. With floating exchange rates worldwide, the impact on Europe will be limited while Asia´s tradables sector will shrink.

Suggested Citation

  • Engler, Philipp, 2009. "Global rebalancing in a three-country model," Discussion Papers 2009/1, Free University Berlin, School of Business & Economics.
  • Handle: RePEc:zbw:fubsbe:20091
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    Cited by:

    1. Karl Farmer & Irina Ban, 2017. "Modeling Financial Integration, Intra-EMU and Asian-US External Imbalances," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 23(3), pages 261-281, August.
    2. Christoph Zwick, 2013. "Current Account Adjustment in the Euro-Zone: Lessons from a Flexible-Price-Model," Graz Economics Papers 2013-08, University of Graz, Department of Economics.
    3. Christoph Zwick, 2016. "Current Account Adjustment in the Eurozone: Lessons From a Flexible Price Model," The World Economy, Wiley Blackwell, vol. 39(7), pages 1025-1045, July.
    4. Yongzheng Yang, 2011. "Global Rebalancing: Implications for Low-Income Countries," IMF Working Papers 2011/239, International Monetary Fund.
    5. Karl Farmer & Bogdan Mihaiescu, 2016. "Credit constraints and differential growth in equilibrium modeling of EMU and global trade imbalances," Graz Economics Papers 2016-05, University of Graz, Department of Economics.

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    More about this item

    Keywords

    Global imbalances; US current account deficit; dollar adjustment; sectoral adjustment;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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