*External Imbalances and the Us Current Account: How Supply-Side Changes Affect an Exchange Rate Adjustment

15 Pages Posted: 28 Oct 2009

See all articles by Philipp Engler

Philipp Engler

International Monetary Fund (IMF)

Michael Fidora

European Central Bank (ECB)

Christian Thimann

AXA Group

Abstract

The influential work of Obstfeld and Rogoff argues that a closing-up of the US current account deficit involves a large exchange rate adjustment. However, the Obstfeld–Rogoff model works exclusively via demand-side channels and abstracts from possible supply-side changes. We extend the framework to allow for endogenous supply-side changes and show that this fundamentally alters the mechanism of the adjustment process. Allowing for such an extension attenuates quite significantly the implied exchange rate adjustment. The paper also provides some empirical evidence of variations in the supply-side structure and correlations with the exchange rate and the current account. The policy implications are that measures to foster a supply-side reaction would facilitate the external adjustment by alleviating an exclusive reliance on demand and exchange rate changes, with the latter being potentially destabilizing for the global financial system.

Suggested Citation

Engler, Philipp and Fidora, Michael and Thimann, Christian, *External Imbalances and the Us Current Account: How Supply-Side Changes Affect an Exchange Rate Adjustment. Review of International Economics, Vol. 17, Issue 5, pp. 927-941, November 2009, Available at SSRN: https://ssrn.com/abstract=1495311 or http://dx.doi.org/10.1111/j.1467-9396.2008.00785.x

Philipp Engler (Contact Author)

International Monetary Fund (IMF) ( email )

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

Michael Fidora

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 5713 (Phone)

Christian Thimann

AXA Group ( email )

25 avenue Matignon
Paris, 75008
France

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