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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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Are There Thresholds of Current Account Adjustment in the G7?

Are There Thresholds of Current Account Adjustment in the G7?

(p.169) 5 Are There Thresholds of Current Account Adjustment in the G7?
G7 Current Account Imbalances

Richard H. Clarida

Manuela Goretti

Mark P. Taylor

University of Chicago Press

This chapter addresses the nonlinear models of current account adjustment for the G7 countries. For most of the G7 countries, significant evidence of threshold effects in current account adjustment is observed. Statistically significant increases in exchange rate volatility during current account deficit adjustment regimes for the United States, Japan, and Germany are found. Additionally, it shows that compared to other G7 countries, the United States over the sample exhibited relatively wide thresholds within which current account adjustment is absent and relatively slow speeds of adjustment once these thresholds, especially the deficit threshold, are crossed. The U.S. current account deficit is in part an endogenous, general equilibrium outcome of global financial and macroeconomic integration. Moreover, it identifies a tendency toward G7 exchange rate depreciation during current account deficit regimes and exchange rate appreciation during current account surplus regimes.

Keywords:   nonlinear models, current account adjustment, G7, exchange rate, United States, Japan, Germany, current account deficit

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