Smooth Landing or Crash?

Hamid Faruqee, Douglas Laxton, Dirk Muir and Paolo A. Pesenti

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:
Smooth Landing or Crash?

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This chapter employs a sophisticated new open economy multicountry simulation model to examine different scenarios for global current account adjustment. The analysis indicates that competition-friendly structural policies could play a prominent role in reducing current account imbalances on a sustainable basis if they were linked with a sustained increase in growth and a permanent downward shift in the net foreign asset positions of Europe and Japan. Japan and the euro area are relatively stable in terms of adjustment. US fiscal consolidation would not be obtained without some short-run costs for output growth. Europe and Japan could meaningfully add to the multilateral adjustment process through stronger pursuit of growth-enhancing structural reforms that align with their own national interests. Labor market reforms alone might not significantly contribute to rebalancing.

Keywords: simulation model; global current account adjustment; structural policies; current account imbalances; foreign asset; Europe; Japan; labor market reforms

Chapter.  22427 words.  Illustrated.

Subjects: Financial Markets

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