Sterling Implications of a US Current Account Reversal

Abstract

This paper investigates the potential implications for sterling of the US current account returning to balance. The analysis is conducted using a three-country model comprising the United Kingdom, the United States and a block that is meant to represent the rest of the world. The main conclusion from our analysis is that the potential implications for sterling of a US current account reversal are highly uncertain - one can derive a wide range of estimates for the potential changes. Estimates of the sterling adjustments are smaller than the implied movements in the dollar and depend heavily on (a) the cause of the US current account adjustment; (b) the assumptions one makes about the associated adjustment of the UK current account deficit; and (c) assumptions about key model parameters.