TY - JOUR AU - Faruqee, Hamid AU - Laxton, Douglas AU - Muir, Dirk AU - Pesenti, Paolo TI - Smooth Landing or Crash? Model-Based Scenarios of Global Current Account Rebalancing JF - National Bureau of Economic Research Working Paper Series VL - No. 11583 PY - 2005 Y2 - August 2005 DO - 10.3386/w11583 UR - http://www.nber.org/papers/w11583 L1 - http://www.nber.org/papers/w11583.pdf N1 - Author contact info: Hamid Faruqee International Monetary Fund 700 19th Street Washington, DC 20431 E-Mail: hfaruqee@imf.org Douglas Laxton International Monetary Fund 700 19th Street Washington, DC 20431 E-Mail: laxtoneconomics@gmail.com Dirk Muir Bank of Canada 234 Wellington Street, Ottawa ON Canada K1A 0G9 E-Mail: dmuir@bank-banque-canada.ca Paolo A. Pesenti Federal Reserve Bank of New York 33 Liberty Street New York, NY 10045 Tel: 212/720-5493 Fax: 212/720-6831 E-Mail: paolo.pesenti@ny.frb.org M1 - published as Hamid Faruqee, Douglas Laxton, Dirk Muir, Paolo A. Pesenti. "Smooth Landing or Crash? Model-Based Scenarios of Global Current Account Rebalancing," in Richard H. Clarida, editor, "G7 Current Account Imbalances: Sustainability and Adjustment" University of Chicago Press (2007) AB - This paper re-examines the implications, risks, and attendant policies surrounding global rebalancing of current accounts through the lens of a dynamic, multi-region model of the global economy. In the baseline scenario, world macroeconomic imbalances of the early 2000s can be attributed to a combination of six related but distinct tendencies: (i)expansionary U.S. fiscal policy, (ii) declining rate of U.S. private savings, (iii) increased foreign demand for U.S. assets, particularly in Asia, (iv) strong productivity growth in emerging Asia, (v) lagging productivity growth in Japan and the euro area, and (vi) gaining export competitiveness in emerging Asia. The baseline projects stabilizing U.S. public and foreign debt (albeit at higher levels) and a gradual depreciation of the dollar, allowing the U.S. external deficit to gradually move to a sustainable level. An alternative scenario, involving a sudden portfolio reshuffling in the rest of the world, would result in higher U.S. real interest rates, a significantly weaker dollar, with harmful effects on U.S. (and possibly global) growth. More flexible exchange rates in emerging Asia can help reduce variability in both regional output and inflation. Other simulations consider the effects of U.S. fiscal adjustment, as well as growth-enhancing structural reforms in Europe and Japan. ER -