Faruqee, Laxton, Muir, and Pesenti re-examine the issues surrounding global rebalancing through the lens of a dynamic, multi-region model of the world economy.

• Position: Conferences

Faruqee, Laxton, Muir, and Pesenti re-examine the issues surrounding global rebalancing through the lens of a dynamic, multi-region model of the world economy. The authors first define a baseline scenario of global adjustment, based on the premise that the world macroeconomic imbalances of the early 2000s can be attributed to a combination of several related but distinct tendencies: a negative U.S. fiscal shock, a decrease in the U.S. private savings rate, an increase in the demand for U.S. assets abroad, particularly in Asia, a positive shock to productivity growth in emerging Asia, and a negative shock to productivity growth in Japan and the Euro Area. The baseline scenario projects a buildup of government debt and a decline in net foreign assets in the United States. A gradual depreciation of the exchange rate allows the U.S. current account deficit to...