Implications for the Yen of Japanese Current Account Adjustment

Maurice Obstfeld

Center for International and Development Economics Research, Working Paper Series from Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley

Abstract: This paper presents a quantitative evaluation of the effect on the yen of some alternative scenarios under which Japan reaches current account balance. The analytical framework is a global general-equilibrium model, based closely on Obstfeld and Rogoff (2005a, 2005b), within which relative prices clear the world markets for traded goods as well as the domestic markets for nontraded goods. Depending on assumptions about the critical substitution elasticities underlying the model, the yen could appreciate by as much as 10 per cent for each 1 percent of GDP reduction in its current account surplus. The effect would be smaller if substitution elasticities are larger, or if adjustment is accompanied by an expansion of Japanese nontradable output, the latter presumably implied by a return to a more efficient level of labor utilization.

Keywords: current account adjustment; international capital flows; exchange rates; external imbalance; net foreign assets; real exchange rate; sustainability (search for similar items in EconPapers)
Date: 2006-06-01
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Citations: View citations in EconPapers (4)

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