The U.S. Dollar and Global Imbalances

Liu, Kai and Zhou, Xuan (2015): The U.S. Dollar and Global Imbalances.

Abstract

Global Imbalances are mainly featured by the massive and long-lasting U.S. trade deficit. Since the Breton Woods system collapsed and was replaced by the Jamaica Agreement, the U.S. trade deficit has been lasting for about 40 years. This paper proves that permanent global imbalances can be sustainable due to the special role of the U.S. dollar, by building a two-country cash-in-advance growth model with a dollar standard in the international trade. The permanent U.S. trade deficit is an increasing function of the strength of off-shore dollar demand, the long-run growth rate of global nominal GDP, the openness of the international trade, the elasticity of substitution between domestic and foreign goods, and the relative size of the U.S. economy to the rest of the world. The long-run non-neutrality of the U.S. dollar as the world currency exists. Structural global imbalances are accompanied by an unequal international trade with the terms of trade being beneficial to the U.S., and the welfare analysis indicates that: a weakened U.S. dollar in the international trade will reduce the welfare of the U.S. households, but increase the welfare of the whole world.

• Item Type: MPRA Paper
• Language: English
• Keywords: U.S. dollar, global imbalances, dollar standard, cash in advance
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

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