Global Rebalancing in a Three-Country Model

This paper extends the model of Engler et al. (2007) on the adjustment of the US current account to a three-country world economy. This allows an analysis of the differential impact of a reversal of the US current account on Europe and Asia. In particular, the outcomes under different exchange rate policies are analysed. The main nding is that large factor re-allocations from non-tradables to tradables will be necessary in the US. The direction of factor re-allocation in Asia depends on whether the "Bretton-Woods-II" regime of unilaterally xed or manipulated exchange rates in Asia is continued. If this is the case, the tradables sector and the current account surplus will continue to grow even when the US de cit closes. The ip side of this result is that Europe will face a huge real appreciation and an enormous current account de cit. With oating exchange rates worldwide, the impact on Europe will be limited while Asia ́s tradables sector will shrink. JEL: E2, F32, F41.