Smooth Landing or Crash? Model-Based Scenarios of Global Current Account Rebalancing

Abstract

This paper re-examines the implications, risks, and attendant policies surrounding global rebalancing of current accounts through the lens of a dynamic, multi-region model of the global economy. In the baseline scenario, world macroeconomic imbalances of the early 2000s can be attributed to a combination of six related but distinct tendencies: (i)expansionary U.S. fiscal policy, (ii) declining rate of U.S. private savings, (iii) increased foreign demand for U.S. assets, particularly in Asia, (iv) strong productivity growth in emerging Asia, (v) lagging productivity growth in Japan and the euro area, and (vi) gaining export competitiveness in emerging Asia. The baseline projects stabilizing U.S. public and foreign debt (albeit at higher levels) and a gradual depreciation of the dollar, allowing the U.S. external deficit to gradually move to a sustainable level. An alternative scenario, involving a sudden portfolio reshuffling in the rest of the world, would result in higher U.S. real interest rates, a significantly weaker dollar, with harmful effects on U.S. (and possibly global) growth. More flexible exchange rates in emerging Asia can help reduce variability in both regional output and inflation. Other simulations consider the effects of U.S. fiscal adjustment, as well as growth-enhancing structural reforms in Europe and Japan.

Financial Integration, Financial Development, and Global Imbalances

“…Our work is also related to studies that investigate global imbalances with quantitative dynamic general equilibrium models (see Hunt and Rebucci 2005;IMF 2005;Faruqee, Laxton, and Pesenti 2007). In these studies, global imbalances emerge as the outcome of a combination of exogenous shocks, such as a permanent increase in the U.S. fiscal deficit, a permanent decline in the rate of time preference in the United States, and a permanent increase in foreign demand for U.S. financial assets.…”

Real convergence and its illusions

“…These models and their offspring have been used in a variety of applications, including scenarios of global current account rebalancing (Faruqee et al, 2005), labour tax reforms (Coenen et al, 2008a), fiscal consolidation (Coenen et al, 2008b), structural reforms (Everaert and Schule, 2006) or globalization (Jacquinot and Straub, 2008).…”

Global imbalances, current account rebalancing and exchange rate adjustments

“…Our paper is also a production economy model. We have two countries and two-sectors in our model, which is simpler than the models of Faruqee et al (2007Faruqee et al ( , 2008, Vogel (2010) and Straub and Thimann (2010). But distinct from these papers and from the related literature, we explicitly study the speed of adjustment process and …nd that quantitative implications can di¤er signi…cantly between di¤erent speed scenarios.…”

“…In contrast to these endowment models, Faruqee et al (2007Faruqee et al ( , 2008 set up a production economy of four blocks of countries and they …rst try to present cases such that the given level of imbalances can be generated in the model and then they analyze the e¤ects of di¤erent policies on the imbalances. Their study o¤ers a very rich framework to study the dynamics of imbalances and the interactions of several structural factors such as tari¤s and competition.…”