Rebalancing the US Economy in a Postcrisis World

30 Pages Posted: 15 Aug 2010

See all articles by Barry Bosworth

Barry Bosworth

Brookings Institution - Economic Studies Program

Susan M. Collins

affiliation not provided to SSRN

Date Written: August 5, 2010

Abstract

The objective of this paper is to explore how the external balance of the United States (US) might evolve in future years as the economy emerges from the recession. We examine the issue from the domestic perspective of the saving and investment balance and from the external side in terms of the basic determinants of exports and imports and the role of the real exchange rate. Using these two respective perspectives, we highlight (1) causes and consequences of low private and public saving in the US, and (2) sensitivity of trade to variations in the real exchange rate. We highlight the need for sustained depreciation of the dollar to improve the competitiveness of US exports and argue that the current exchange rate is consistent with a significant reduction in the size of the trade deficit.

However, the favorable external outlook is very inconsistent with a projected domestic situation of low rates of private saving and a very large public sector budget deficit matched by a cyclically depressed rate of investment. Changes in US corporate tax structure, reconsideration of capital controls, and perhaps some further decline in the level of real exchange rates could help soften the impact of a potentially very hard postrecession landing for the United States.

Keywords: saving investment balance, basic determinants export, american economy postcrisis

JEL Classification: F32, F41, F42

Suggested Citation

Bosworth, Barry and Collins, Susan M., Rebalancing the US Economy in a Postcrisis World (August 5, 2010). ADBI Working Paper No. 236, Available at SSRN: https://ssrn.com/abstract=1658336 or http://dx.doi.org/10.2139/ssrn.1658336

Barry Bosworth (Contact Author)

Brookings Institution - Economic Studies Program ( email )

1775 Massachusetts Avenue, NW
Washington, DC 20036
United States
202-797-6000 (Phone)
202-797-6181 (Fax)

Susan M. Collins

affiliation not provided to SSRN

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