Macroeconomic Policies, Competitiveness, and U.S. External Adjustment

Abstract

This paper presents an empirical analysis of the relationships among the U.S. external balance, exchange rates, macroeconomic policies, and longer-term trends in relative labor productivity. Movements in the U.S. external balance over the past two decades have been determined to a substantial degree by shifts in U.S. international price and cost competitiveness. Movements in price and cost competitiveness, in turn, have been dominated by swings in nominal exchange rates, which can be explained to a large extent by shifts in fiscal and monetary policies at home and abroad. A longer-term downward trend in the dollar may have been associated with secular decline in U.S. relative to foreign productivity in manufacturing. The downtrend in relative productivity has leveled off in recent years, however. The likelihood of a resumption of the downtrend in relative productivity may be reduced, at current level of exchange rates, by a shift in manufacturing investment towards.