The Transfer Problem in Reducing the U.S. Current-Account Deficit

Ronald I. McKinnon

in The Unloved Dollar Standard

Published in print December 2012 | ISBN: 9780199937004
Published online January 2013 | e-ISBN: 9780199980703 | DOI:
The Transfer Problem in Reducing the U.S. Current-Account Deficit

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Correcting global trade imbalances is a form of the transfer problem: spending must be transferred from trade-deficit countries (mainly the United States) to trade-surplus countries. Reducing the U.S. current account deficit requires that net saving, i.e., saving minus investment) be increased in the United States and reduced abroad—particularly in Asia. But contrary to most literature on the subject, exchange rates need not, and probably best not, be changed as part of the transfer process for improving the U.S. trade balance. To show why this is so, the chapter draws on the older literature on the transfer problem associated with paying war reparations. Adjustment in absorption, i.e., aggregate spending, is two-sided because the loser (the transferor) must raise taxes to pay an indemnity to the winner (the transferee), which then spends it. But there is no presumption that the terms of trade must turn against the transferor. That is, the losing country, which is forced into running a trade surplus (or smaller deficit), need not depreciate its real exchange rate to effect the transfer.

Keywords: transfer problem; war reparations; absorption adjustment; real exchange rate

Chapter.  3343 words. 

Subjects: Financial Markets

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