Foreign Demand

Philip Arestis and Elias Karakitsos
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Elias Karakitsos: University of Cambridge

Chapter 8 in The Post-Bubble US Economy, 2004, pp 206-234 from Palgrave Macmillan

Abstract: Abstract The buoyancy of the US economy since the end of the Iraq war and the spectacular recovery of exports in the US, the euro area1 and Japan, and we refer to them as (G-3) in what follows, in the third quarter of 2003 have raised hopes of a US-led world recovery. The OECD index of leading indicators has continued to rise and this heralds further strengthening of (G-3) exports in the months ahead. However, the conclusion of a world recovery over a longer horizon depends on the strength of the US economy and the extent of previous changes in competitiveness. In this respect, the US and Japan have gained competitiveness in the last two years, while the euro area has suffered a great loss. However, if the US economy were to grow as fast as potential output in the next two years, then the world economy would recover.2 Such growth would be sufficient to offset previous losses in competitiveness and allow the euro area to enjoy an export-led recovery. Steady growth in the US at potential output is preferable to fast growth in 2004 and weak growth in 2005, but with the same average, because the world recovery would falter. The implication is that domestic demand in the euro area and Japan should be boosted by accommodative economic policy. Although the same effect can be achieved by easy fiscal policy in the US, this may not be desirable at this phase of the US business cycle.

Keywords: Forecast Error; Euro Area; Domestic Demand; Nominal Exchange Rate; Real Effective Exchange Rate (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1057/9780230501058_8

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