Global Rebalancing with Gravity: Measuring the Burden of Adjustment
We use a forty-two country model of production and trade to assess the implications of eliminating current account imbalances for relative wages, relative GDP's, real wages, and real absorption. How much relative GDP's need to change depends on flexibility of two forms: factor mobility and the adjustment in sourcing of imports, with more flexibility requiring less change. At the extreme, US GDP falls by 30 percent relative to the world's. Because of the pervasiveness of nontraded goods, however, most domestic prices move in parallel with relative GDP, so that changes in real GDP are small.
Prepared for the International Monetary Fund's Eighth Annual Jacques Polak Research Conference, 2007. We have benefitted from comments by our discussant, Doireann Fitzgerald. Eaton and Kortum gratefully acknowledge the support of the National Science Foundation. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Robert Dekle & Jonathan Eaton & Samuel Kortum, 2008. "Global Rebalancing with Gravity: Measuring the Burden of Adjustment," IMF Staff Papers, Palgrave Macmillan Journals, vol. 55(3), pages 511-540, July. citation courtesy of