Sources of Macroeconomic Imbalances in the World Economy: A Simulation Approach

Jeffrey D. Sachs, Nouriel Roubini

NBER Working Paper No. 2339
Issued in August 1987
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics

This paper uses a global macroeconomic simulation model to identify the factors that have contributed to global trade and financial imbalances in the 1980s. After investigating the properties of monetary and fiscal policies in the model, we examine whether the budgetary shifts in the OECD economies in the 1980s can account for the bulk of trade and exchange rate movements. Our conclusions are mixed. The combination of sharply higher fiscal deficits in the United States and sharply reduced deficits in Japan goes far to explain the movements of the trade balances and exchange rates of the two economies. However, the drop in the dollar vis-a-vis the Yen since late 1985 is not well explained by the model. We also investigate the prospects for a reduction of the U.S. trade deficits if U.S. budget deficits are in fact reduced, as well as the possible role for Japanese monetary and fiscal policies in reducing the trade imbalances of the two countries.

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Document Object Identifier (DOI): 10.3386/w2339

Published: Toward a World of Economic Stability, (ed) Yoshio Suzuki and Mitsuaki Okabe University of Tokyo Press: Tokyo, Japan, 1988.

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