Current Account Rebalancing and Real Exchange Rate Adjustment Between the U.S. and Emerging Asia
IMF Working Papers, March 1, 2011
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- Current Account Rebalancing and Real Exchange Rate Adjustment Between the U.S. and Emerging Asia
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Bibliographic details
- Authors: Damiano Sandri, Pau Rabanal, Isabelle Mejean
- Published: March 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455218967.001
Summary
- Authors: Damiano Sandri, Pau Rabanal, Isabelle Mejean
- Date: March 1, 2011
- Core point: A reduction in the U.S. current account deficit vis-à-vis emerging Asia involves a shift in demand from U.S. to emerging Asia tradable goods and a change in international relative prices.
- Objective: Quantify the required adjustment in the terms of trade and real exchange rates in a three-country open economy model of the U.S., China, and other emerging Asia.
Model and Scenarios
- Framework: Three-country open economy model (U.S., China, other emerging Asia).
- Scenarios compared:
- Both Chinese and other emerging Asian export prices change by the same proportion.
- Export prices remain constant in one country and increase in the other.
- Focus variables: terms of trade, real exchange rates, demand shifts between U.S. and emerging Asia tradable goods.
Key Findings
- Quantification: The paper quantifies the magnitude of terms of trade and real exchange rate adjustments required to reduce the U.S. current account deficit vis-à-vis emerging Asia (specific magnitudes are provided in the paper).
- Comparative outcomes: Real exchange rate and terms-of-trade adjustment requirements differ depending on whether export prices move jointly across China and other emerging Asia or only in one of these regions.
Robustness and Sensitivity
- Results are robust to:
- Different assumptions about elasticities of substitution.
- Introducing a high degree of vertical fragmentation in production in the model.
Subject and Keywords
- Subject: Consumption, Export prices, Imports, Terms of trade, Trade balance
- Keywords: WP