The U.S. Dollar and Global Imbalances

Kai Liu and Xuan Zhou

MPRA Paper from University Library of Munich, Germany

Abstract: Global Imbalances are mainly featured by the massive and long-lasting U.S. trade deficit. Since the Breton Woods system collapsed and was replaced by the Jamaica Agreement, the U.S. trade deficit has been lasting for about 40 years. This paper proves that permanent global imbalances can be sustainable due to the special role of the U.S. dollar, by building a two-country cash-in-advance growth model with a dollar standard in the international trade. The permanent U.S. trade deficit is an increasing function of the strength of off-shore dollar demand, the long-run growth rate of global nominal GDP, the openness of the international trade, the elasticity of substitution between domestic and foreign goods, and the relative size of the U.S. economy to the rest of the world. The long-run non-neutrality of the U.S. dollar as the world currency exists. Structural global imbalances are accompanied by an unequal international trade with the terms of trade being beneficial to the U.S., and the welfare analysis indicates that: a weakened U.S. dollar in the international trade will reduce the welfare of the U.S. households, but increase the welfare of the whole world.

Keywords: U.S. dollar; global imbalances; dollar standard; cash in advance (search for similar items in EconPapers)
JEL-codes: E42 F32 F41 (search for similar items in EconPapers)
Date: 2015-06-04
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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