Global Rebalancing in a Three-Country Model
Freie Universität Berlin
March 7, 2009
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.
Number of Pages in PDF File: 28
Keywords: Global imbalances, US current account deficit, dollar adjustment, sectoral adjustment
JEL Classification: E2, F32, F41working papers series
Date posted: April 9, 2009 ; Last revised: April 22, 2009
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