Debt Dynamics and Global Imbalances: Some Conventional Views Reconsidered

January 1, 2007

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Format: Chicago

Guy M Meredith. Debt Dynamics and Global Imbalances: Some Conventional Views Reconsidered, (USA: International Monetary Fund, 2007) accessed March 19, 2025

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We use a general-equilibrium model to explain the rise in global trade and payments imbalances since the mid-1990s, and then to construct adjustment paths to a steady state. Assuming that the shocks giving rise to the imbalances do not suddenly reverse, simulated movements in the U.S. trade deficit and exchange rate are smaller and more gradual than suggested by partial-equilibrium analyses. An important factor reducing the size of the adjustments is a simulated real interest rate on U.S. external liabilities that is below both the interest rate on external assets and the U.S. real economic growth rate. In addition, the adjustment takes place over an extended period without significantly raising the share of U.S. assets in foreign portfolios, in part because depreciation of the dollar requires continued foreign accumulation of U.S. assets just to keep their portfolio share constant.

Subject: Foreign assets, Real exchange rates, Real interest rates, Trade balance, Trade deficits

Keywords: Exchange rate, Real interest rate, Trade deficit, WP

Publication Details

Pages:

54
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/004
Stock No:

WPIEA2007004
ISBN:

9781451865684
ISSN:

1018-5941

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