2 - Prospects for Global Trade Imbalances: A Simulation Approach

Abstract

This chapter presents a simulation model of the world economy. The simulation model is designed to highlight the way in which macroeconomic policy choices affect the global economy. This chapter also reviews the patterns of exchange rate and trade balance movements in the 1980s and describes how alternative policy choices are likely to affect those variables. The broad movements of the dollar can be understood by reference to the differing macroeconomic policies pursued in the industrialized economies. The chapter focuses on two alternative views of the movement of the dollar that have received significant attention. It also discusses alternative macroeconomic and financial policy measures for reducing trade imbalances, particularly for reducing the trade deficits of the United States. The chapter also discusses three alternative scenarios: (1) the case in which US budget deficits remain large, (2 the case in which the budget deficits are reduced à la Gramm-Rudman, and (3) the case of a hard-landing for the dollar.