Economics at your fingertips  

External Imbalances and the US Current Account: How Supply‐Side Changes Affect an Exchange Rate Adjustment*

Philipp Engler, Michael Fidora () and Christian Thimann ()

Review of International Economics, 2009, vol. 17, issue 5, 927-941

Abstract: The influential work of Obstfeld and Rogoff argues that a closing‐up of the US current account deficit involves a large exchange rate adjustment. However, the Obstfeld–Rogoff model works exclusively via demand‐side channels and abstracts from possible supply‐side changes. We extend the framework to allow for endogenous supply‐side changes and show that this fundamentally alters the mechanism of the adjustment process. Allowing for such an extension attenuates quite significantly the implied exchange rate adjustment. The paper also provides some empirical evidence of variations in the supply‐side structure and correlations with the exchange rate and the current account. The policy implications are that measures to foster a supply‐side reaction would facilitate the external adjustment by alleviating an exclusive reliance on demand and exchange rate changes, with the latter being potentially destabilizing for the global financial system.

Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

Downloads: (external link)

Related works:
Working Paper: External imbalances and the US current account: how supply-side changes affect an exchange rate adjustment (2007) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0965-7576

Access Statistics for this article

Review of International Economics is currently edited by E. Kwan Choi

More articles in Review of International Economics from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().

Page updated 2020-01-14
Handle: RePEc:bla:reviec:v:17:y:2009:i:5:p:927-941