Global Imbalances, Current Account Rebalancing and Exchange Rate Adjustments

Global Imbalances, Current Account Rebalancing and Exchange Rate Adjustments

Title : Global Imbalances, Current Account Rebalancing and Exchange Rate Adjustments
Number : 11/27
Author(s) : Yavuz Arslan, Mustafa Kılınç, M. İbrahim Turhan
Language : English
Date : December 2011
Abstract : We analyze the global imbalances and the required adjustments for rebalancing in current accounts and real exchange rates. 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 of the US in the next ten years consistent with the fast growth expectations in China. Secondly, we assume that China initially runs a net export surplus against the US. 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 also decreases slowly. Second scenario, called Quick Adjustment, assumes that in addition to the higher non-tradable share in output, 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 also appreciate faster and at a higher rate than Slow Adjustment case. 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.
Keywords : Global imbalances, Current accounts, Exchange rate adjustments
JEL Codes : F32, F36, F41

Global Imbalances, Current Account Rebalancing and Exchange Rate Adjustments
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