Current Accounts and National Savings: Rebalancing Demand in China and the United States

Abstract

The persistence of global current account imbalances in the last decade has highlighted the importance of examining and understanding the causes of imbalances. Although generally studied as a macroeconomic phenomenon, changes to the current account may have effects on the microeconomy that warrant examination. This paper uses an applied microeconomic general equilibrium model to examine changes to current account imbalances existing between the U.S. and China. The microeconomic effects of a rebalancing of domestic demand in China that lessens the current account surplus and generates a real appreciation of the renminbi are analyzed. The U.S. current account deficit narrows in response to the real appreciation of the renminbi, but the economy contracts by a small amount. Further analysis demonstrates a reduction in the rate of consumption in the U.S. also results in a narrowing of the current account deficit and suggests that consumption fuels both the current account deficit and economic growth. The analysis has implications for global current account imbalances, as the importance of domestic structural adjustments in reducing imbalances is highlighted.