Abstract
Since the US current account deficit (over 6%) is relatively large, many economists have questioned its sustainability. This paper aims to examine the relationship between the US trade balance and related economic variables by constructing a six-dimensional version of the structural vector autoregression (SVAR) model. According to our empirical results, a reduction in the US fiscal deficits cannot reduce the US imbalances. Despite reduction in trade deficits, the US recession can damage the world economy. The expansion of overseas economies is required to reduce global imbalances without global recession. One of our implications is that foreign countries should increase domestic demand.
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