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Monetary Policy and Global Imbalances

Published online by Cambridge University Press:  26 March 2020

Ray Barrell  and
Ian Hurst
Ray Barrell
Affiliation:
National Institute of Economic and Social ResearchUK
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Extract

The US current account imbalance has stayed stubbornly high despite the fall in the dollar that we have seen since the beginning of 2003. The exchange rate has fallen by around 15 per cent on average, mainly between the first quarter of 2003 and the first quarter of 2005. As we can see from figure 1, the fall has come in three steps, and each time it fell we might have expected an initial worsening of the current account for a year or so as prices change in advance of quantities (the J curve effect of the first year textbook). Hence we might have expected no sustained improvement until at least a year after the last downward step towards the end of 2004. However, as we can see from figure 2, there is no noticeable improvement in the current account during 2006, suggesting that domestic absorption was rising. At the same time inflation in the US was gradually drifting up under pressure from the weakening exchange rate.

Type
Articles
Information
National Institute Economic Review , Volume 199 , 01 January 2007 , pp. 34 - 39
Copyright
Copyright © 2007 National Institute of Economic and Social Research

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Footnotes

We would like to thank Dawn Holland and Martin Weale for their comments.

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