U.S. Imbalances: The Role of Technology and Policy

38 Pages Posted: 16 May 2008

See all articles by Rudolfs Bems

Rudolfs Bems

International Monetary Fund (IMF); European Central Bank (ECB)

Luca Dedola

Bank of Italy; European Central Bank (ECB)

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Date Written: February 2007

Abstract

This paper investigates the role of three likely factors in driving the steady deterioration of the US external balance: US technology developments, changes in the US government fiscal position and the Fed's monetary policy. Estimating several Vector Autoregressions on US data over the period 1982:2 to 2005:4 we identify five structural shocks: a multi-factor productivity shock; an investment-specific technology shock; a monetary policy shock; and a fiscal revenue and spending shock. Together these shocks can account for the deterioration and subsequent reversal of the trade balance in the 1980s. Productivity improvements and fiscal and monetary policy easing also play an important role in the increase of the external deficit since 2000, but these structural shocks can not explain why the trade balance deteriorated in the second half of the 1990s.

Keywords: Global imbalances, open economy, VARs

JEL Classification: F3, F4

Suggested Citation

Bems, Rudolfs and Dedola, Luca and Smets, Frank, U.S. Imbalances: The Role of Technology and Policy (February 2007). CEPR Discussion Paper No. DP6110, Available at SSRN: https://ssrn.com/abstract=1133735

Rudolfs Bems (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Luca Dedola

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Frank Smets

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

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Leuven, B-3000
Belgium

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