Chapter

Are There Thresholds of Current Account Adjustment in the G7?

Richard H. Clarida, Manuela Goretti and Mark P. Taylor

in G7 Current Account Imbalances

Published by University of Chicago Press

Published in print May 2007 | ISBN: 9780226107264
Published online February 2013 | e-ISBN: 9780226107288 | DOI: http://dx.doi.org/10.7208/chicago/9780226107288.003.0006
Are There Thresholds of Current Account Adjustment in the G7?

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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

Chapter.  13688 words.  Illustrated.

Subjects: Financial Markets

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