Correcting US Imbalances

Publication date: 22 Mar 2007 | Publication type: NIESR Discussion Paper | NIESR Author(s): Barrell, R; Holland, D; Hurst, I | JEL Classification: F32, F42, F47 | NIESR Discussion Paper Number: 290

The US current account deficit is in excess of 6 per cent of GDP, and is leading to an accumulation of debts. We use NiGEM to evaluate the causes of the decline, and suggest that domestic absorption in the US has increased markedly. Nominal realignments and monetary expansions elsewhere are shown to be only short term palliatives. A sustained change in the current account must come either from a real realignment associated with a rise in risk premia on US assets or from a change in domestic absorption in the US and elsewhere. Any adjustment must be associated with a significant change in eth US real exchange rate to induce expenditure switching as well.

Keyword tags: 
current account imbalances, realignments, risk premia, policy coordination