Date Added: Apr 2011
This paper considers the implications for the United States, the United Kingdom and the Rest Of the World (ROW) of shocks that may contribute to a further reduction in global current account imbalances using a Dynamic Stochastic General Equilibrium (DSGE) model. The authors consider a shock that increases domestic demand in the ROW; a shock that reduces domestic demand in the United States; and a supply shock that raises US productivity relative to other countries. The impact on UK output and inflation depends on the nature of the shock that drives global rebalancing. An increase in domestic demand in the ROW would raise UK exports and output, but would also contribute to increased inflationary pressure in the United Kingdom.