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G7 Current Account ImbalancesSustainability and Adjustment$
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Richard H. Clarida

Print publication date: 2007

Print ISBN-13: 9780226107264

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226107288.001.0001

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Smooth Landing or Crash?

Smooth Landing or Crash?

Model-Based Scenarios of Global Current Account Rebalancing

(p.377) 10 Smooth Landing or Crash?
G7 Current Account Imbalances

Hamid Faruqee

Douglas Laxton

Dirk Muir

Paolo A. Pesenti

University of Chicago Press

This chapter employs a sophisticated new open economy multicountry simulation model to examine different scenarios for global current account adjustment. The analysis indicates that competition-friendly structural policies could play a prominent role in reducing current account imbalances on a sustainable basis if they were linked with a sustained increase in growth and a permanent downward shift in the net foreign asset positions of Europe and Japan. Japan and the euro area are relatively stable in terms of adjustment. US fiscal consolidation would not be obtained without some short-run costs for output growth. Europe and Japan could meaningfully add to the multilateral adjustment process through stronger pursuit of growth-enhancing structural reforms that align with their own national interests. Labor market reforms alone might not significantly contribute to rebalancing.

Keywords:   simulation model, global current account adjustment, structural policies, current account imbalances, foreign asset, Europe, Japan, labor market reforms

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