A global model of recovery and rebalancing

Abstract

This paper presents an investigation of global recovery from the Great Recession and the rebalancing of global external imbalances, using a global model of 16 countries and composite regions. The model applies to the short term and only to the real side. Key features are demand-driven output determination, pro-cyclical aggregate labour productivity, imperfect competition in product markets and simple bargaining in non-clearing labour markets, which together determine the functional distribution of income. Trade is modelled in a bilateral import matrix; particular attention is paid to international adjustment. Simulation results suggest that early exit from fiscal support threatens a fragile recovery. Further, domestic demand expansion and revaluation in real terms in surplus countries are necessary for rebalancing, and a variety of measures can be employed to achieve these goals.

Full Report ‐ World of Work Report 2010: From one crisis to the next?

“…11. As shown in the detailed results (Von Arnim, 2010), the Asian aggregate region grows by 1 percentage point, but its aggregate external deficit increases slightly. That is largely due to the fairly strong in-region growth; the Asian deficit region's current account relative to GDP worsens by 0.5 percentage points, outweighing the Asian surplus region's reduction.…”

“…Despite these important caveats, the model helps illustrate the immediate post-crisis paths arising from different rebalancing policies. The main outcomes of these simulations are presented in table 4.1 and a detailed analysis can be found in Von Arnim (2010).…”

“…In this first policy scenario, Chinese exports become more expensive, while imports into China are more competitive. The result is a contraction of China's current account surplus of almost 7 per cent (Von Arnim, 2010), which is relatively small in view of the current size of the global imbalance. Importantly, relative to China's GDP, the current account surplus does not shrink noticeably.…”

“…For instance, a cut in US public borrowing as a share of GDP by 2 percentage points -which is the size of the cut that is often advocated -would lead to a sizeable contraction of GDP in the United States. According to the model, the US unemployment rate would increase by over 3 percentage points and the US external balance relative to GDP would improve by about 1 percentage point relative to GDP, mainly arising from falling imports (Von Arnim, 2010). The latter, in turn, would lead to a downturn in all the regions, especially in the US main trading partners -Canada and Latin America.…”

“…All unemployment rates are for 2008, as are the rest of the data. See Von Arnim (2010) for a more complete discussion of the model and data issues.…”