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Sustainable Adjustment of Global Imbalances

Author

Listed:
  • Ray Barrell
  • Dawn Holland
  • Ian Hurst

Abstract

This paper uses NIESR’s global econometric model, NiGEM, to analyse possible adjustment paths for the US current account, if its current level of 6 per cent of GDP proves unsustainable. Nominal exchange rate shifts have only a transitory impact on current account balances, so any long-term improvement of the US current account balance would require a real and sustained reduction in domestic absorption, or a rise in foreign absorption. This could be effected through a sequence of exchange rate movements driven by a gradual rise in the risk premium on US assets. This would induce a permanent change in the real exchange rate, and would also reduce domestic absorption in the US due to a rise in real interest rates. Global policy coordination, which involved raising domestic demand in countries such as China and Japan, could speed the process of adjustment and ease the negative impact on the US economy.

Suggested Citation

  • Ray Barrell & Dawn Holland & Ian Hurst, 2007. "Sustainable Adjustment of Global Imbalances," CASE Network Studies and Analyses 0343, CASE-Center for Social and Economic Research.
    • Handle: RePEc:sec:cnstan:0343
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    File URL: https://case-research.eu/upload/publikacja_plik/14978708_sa343.pdf
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    Citations

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    Cited by:

    1. Matija Lozej & Graeme Walsh, 2021. "Fiscal Policy Spillovers in a Monetary Union," Open Economies Review, Springer, vol. 32(5), pages 1089-1117, November.
    2. Catte, Pietro & Cova, Pietro & Pagano, Patrizio & Visco, Ignazio, 2011. "The role of macroeconomic policies in the global crisis," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 787-803.
    3. Fic, Tatiana & Barrell, Ray & Holland, Dawn, 2008. "Entry rates and the risks of misalignment in the EU8," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 761-774.

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