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Chapter II. The World Economy
Published online by Cambridge University Press: 26 March 2020
Abstract
Beginning with this Review, the World Economy chapter contains a number of changes in format and content. The first half of the chapter presents the main forecast, which for the first time is produced with the aid of a quarterly econometric model, GEM. The second half of the chapter will be devoted to one or more topical issues concerning the world economic outlook, using analysis based on econometric evidence or model simulations. In this Review we look at the prospects for the US current balance. An appendix briefly outlines the structure of GEM.
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- Copyright © 1987 National Institute of Economic and Social Research
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(1) A delayed pass-through would not influence the speed at which demand increased if firms quickly spent their extra profits on new investment projects. At present there is little sign of such an effect, however. Higher profits may nevertheless support investment in 1987 and 1988.
(2) To some extent, exporters to the US may also have been expecting the rise in the dollar to be temporary, and so delaying any price change as a result.
(3) Export competition between the US and these countries is difficult to judge, because the competition takes place in ‘third markets’.
(4) The export share and relative export prices were not ‘co-integrated’. Co-integration was achieved if we included imports from the LDCs and OPEC as separate independent variables. The implication was that the marginal propensity for LDC imports to come from the US was greater than their average share, and vice versa for the OPEC bloc. One possible explanation for this may be geographical, with US exports tending to go to relatively fast-growing LDCs. However, even though these variables allowed co-integration, substantial first-order autocorrelation remained in the equation.
(5) For a workshop on US current account imbalance held at Brookings, Washington, in January.
(6) Whether ‘equilibrium’ is exact balance is far from clear, partly because the sum of the world's current balances is always in substantial deficit because of recording errors, and partly because of a growing trend for non-US portfolio holders to diversify in foreign, and particularly US, assets (see Brookings Papers on Economic Activity, no.1, 1985, for example).
(7) Horton, G. (1984), ‘Modelling the world economy’, Treasury Working Paper no.33.
(8) This effect, which is not in the original WEP model, is designed to capture the fact that exporters to the United States tend to vary their profit margins as well as their prices following a change in the dollar exchange rate. In principle there should be offsetting effects in other import price equations to ensure consistency between world export and import prices, but these have not yet been introduced into GEM.