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This paper will assess implications of shifting policy mix in the US for global imbalances and adjustment, with a focus on the euro area, using the European Commission’s QUEST model. Following early market euphoria after the elections on the account of expected “decisive” pro-market policies, uncertainty regarding the composition and timing of the new administration's economic policies has been the norm. Early proposals included a substantial fiscal stimulus which, combined with a tightening monetary stance, was expected to drive up long-run interest rates and the dollar, leading to widening global imbalances and potential instability. Today the expansionary impact of the fiscal plans is the subject of a heated debate while monetary policy continues to tighten steadily and risks related to a protectionist trade agenda remain pronounced. Contrary to initial expectations, real interest rates and the dollar have weakened, while global imbalances persist. Addressing policy and structural needs in the US – and abroad – is a necessary condition to rein in global imbalances. In this context, this paper will discuss the role of the G20/G7 to promote a coordinated policy approach and in particular to what extent the G20/G7 can deal with the transition from crisis management to the balancing of heterogeneous preferences among the policy makers to promote global growth and stability. [ABSTRACT FROM AUTHOR]

Global imbalances pose a serious question for academia and policy makers related to its formation, sustainability and correction. In this paper we analyze the required adjustments of exchange rates for rebalancing in current accounts. We set up a two-country two-sector model for the US-China with two asymmetries. First, we assume that the size of China initially is one third of the US but its size becomes half in the next 10 years. Second, we assume that China initially runs a net export surplus. Then we quantitatively study two adjustment scenarios. First scenario, called Slow Adjustment, assumes that in the process of growth, Chinese demand composition moves more towards domestic non-tradable sector. In this case, Chinese real exchange rate appreciates gradually and net export surplus decreases slowly. Second scenario, called Quick Adjustment, assumes that net export surplus against US goes to zero quickly in five years. In this case, net export adjustment happens quickly and real exchange rates in China appreciate at a higher rate. Even though, global imbalances are eliminated faster in the Quick Adjustment case, high real appreciation in China hurts importers in the US. A comparison in terms of output shows that Slow Adjustments is preferred for both countries. [ABSTRACT FROM AUTHOR]

Abstract: This paper argues that the lack of timely and decisive policy action to correct domestic and external imbalances contributed crucially to the build-up of financial excesses that led to the financial crisis and the Great Recession. We focus on 2002–2007 and perform a number of counterfactual simulations to investigate two central elements of the story, namely: (a) an over-expansionary US monetary policy and the absence of effective macro-prudential supervision, which permitted a prolonged expansion of debt-financed consumer spending and (b) the choice by China and other emerging countries to pursue an export-led growth strategy supported by pegging their currencies to the US dollar, in conjunction with sluggish domestic demand in major advanced economies characterized by low potential output growth. The results of the simulations lend support to the view that if substantial, globally coordinated demand rebalancing had been undertaken early on, the macroeconomic and financial imbalances would not have accumulated to the extent that they did and the financial turmoil might have had less drastic global consequences. [Copyright &y& Elsevier]

Abstract: The persistence of global imbalances remains a potential source of instability for the international economic system, which ought to be tackled in order to exit from the current crisis in a better position. This paper shows that the complexity of the global network of trade imbalances has increased over time in terms of the number of countries involved and of the heterogeneity of their conditions. These findings imply that orchestrating a global exchange rate adjustment plan, as done in the 1980s to tackle a similar problem, is certainly more difficult than it was 20 years ago. We also show, however, that the uncoordinated movements in bilateral exchange rates occurred since the early 2000s did not go in the direction of reducing bilateral imbalances. Rebalancing the world economy, thus, seems to require a rich set of coordinated policy actions and economic changes, involving adjustments in both exchange rates and real variables, which are heterogeneous at the country level. We argue that, provided some conditions are satisfied, the variegated effects of the ongoing financial crisis, and the policy responses this has induced, may help the global and bilateral rebalancing process. [Copyright &y& Elsevier]

Abstract: This paper assesses how the current housing and credit crisis will impact US real activity, and how recession interacts with adjustment of global imbalances. A simple real-side model with decreasing returns to factors and non-clearing goods and labor markets is disaggregated into traded and non-traded sectors and three regions (US, EU and Asia). A three region model offers two degrees of freedom and six candidate variables for endogeneity in international accounts. Applying standard income and elasticities approaches as well as a less standard ¿Bretton Woods II¿ closure in simulations suggests external imbalances can be reduced in the current recession with a mix of fiscal expansion and some Asian real appreciation. [Copyright &y& Elsevier]

Abstract: There are two opposing views on global imbalances: The “traditional” view, which regards the imbalances as a threat to global economic and financial stability, and the “new paradigm” view, which considers that they are the natural consequence of economic and financial globalization. In terms of their policy implications, the traditional view focuses on monetary and fiscal policy decisions in the United States that need to be urgently reversed to avoid an abrupt unwinding of the imbalances involving a sell-off of dollar assets, a sharp increase in U.S. interest rates, and a hard landing for the global economy. By contrast, the new paradigm view considers that the imbalances will be resolved smoothly through the normal functioning of markets. This paper argues that an abrupt unwinding of imbalances is highly unlikely and advances a number of arguments in support of the new paradigm view. [Copyright &y& Elsevier]

Abstract: In the article I discuss some possible explanations for two features of financial globalization over recent years; first, the fact that expected returns have fallen significantly in advanced countries, even though economic growth has accelerated; and second, the fact that capital is flowing from poor to rich countries rather than the other way round, a phenomenon known in the literature as the “Lucas Paradox”. The “incomplete” nature of globalization, notably the persistent differences in institutional quality between North and South, might explain both puzzles as well as the emergence of global imbalances. Alternative explanations based on a fall in risk premia and accommodative monetary policy conditions fit the facts less well. I then discuss the implications for monetary policy. [Copyright &y& Elsevier]

Abstract: The late Herb Stein, Chairman of President Richard Nixon''s Council of Economic Advisers, once famously quipped that “something that''s growing too fast forever will stop”. And so it is with the high and rising U.S. current account deficit relative to GDP. That ratio cannot rise forever, but many possibilities exist for adjustment. Where economists in the academic and policymaking communities can be particularly useful is in defining what our concerns should be about the U.S. current account deficit. This essay focuses on three principal questions. First, from an economic perspective, how should we frame worries about the size of the U.S. current account deficit? Second, understanding economic forces behind the current account deficit, how large is the deficit likely to be before adjustments take place to reduce its size? Third, what guidance does economic analysis offer for U.S. policy? This third question is of particular interest, as present policy discussion 25 contains as much mischief as useful guidance. After reviewing the steps policymakers should not take, I focus on two questions, which should be of particular relevance. To wit: Is there a role for fiscal policy toward U.S. household saving? And, what role might fundamental tax reform play? I conclude with some questions for economic analysis. [Copyright &y& Elsevier]

Abstract: This paper questions three separate but related contentions: that Americans save too little; that the large US current account deficit is unsustainable; and that the Chinese currency (rmb) requires large appreciation. Viewed from the perspective of a knowledge-based economy in a globalized world undergoing dramatic demographic change, Americans save quite enough for the future and the US current account deficit is a natural and indeed an expected phenomenon. It can persist for many years. The current configuration of surpluses and deficits is mutually beneficial so long as Americans continue to invest productively. A significant revaluation of the rmb would yield little benefit and would run a grave risk of precipitating financial crises. [Copyright &y& Elsevier]