Comments and Discussion

Richard N. Cooper: This paper by Maurice Obstfeld and Kenneth Rogoff is very much a "what if" exercise. What if demand behaves according to constant elasticity of substitution functions? What if consumption is fixed, apart from terms-of-trade effects? What if the U.S. current account deficit is eliminated (or, in one of the authors' simulations, halved) by an appropriate increase in the U.S. saving rate? Then we learn from the authors' model what the implied changes in exchange rates and the terms of trade must be.

The authors' calibration is necessarily arbitrary, but it seems reasonable. A major contribution of their model is to provide a general equilibrium framework that includes two stylized regions outside the United States. It therefore permits an exploration of differing effects by region, and that seems very useful. The model also includes asset revaluation effects and not just trade effects.

The model assumes flexible prices. As the authors note, it probably understates the exchange rate changes that would be required in a sticky-price regime. The authors also usefully note the potentially ambiguous impact of faster European or Japanese economic growth, which many people see as a potential partial solution to the correction of the U.S. current account deficit. The source of the growth makes a difference, and one should not assume that more-rapid growth abroad will ease the problem. Productivity increases in traded goods, which is where such increases have typically occurred, especially in Japan, could aggravate rather than mitigate the imbalances.

No doubt it is interesting to see how large are the exchange rate changes required to close the U.S. current account deficit, but all the adjustment here is done through prices, including the asset revaluation effect. Whether that is helpful to policy is not at all clear to me. There is no explicit treatment of output or employment in the model. The simulations are driven by a postulated increase in U.S. saving and a corresponding decline in or, in most of the simulations, elimination of the U.S. current account deficit, so that presumably U.S. output is unaffected.

The paper's simulations are, however, unclear about what is happening to saving in the other two regions of the world as the U.S. external deficit is reduced. Their current account surpluses at the outset reflect excessive saving in those two regions, and they disappear in the simulation in which all three current accounts go to zero. But how do they disappear?

Consumption is assumed to be fixed, except for the terms-of-trade effect. The fall in saving in the paper's simulated Europe and Asia therefore implies a corresponding fall in output and income in order to get these results. But a decline in output will surely affect employment, hence income, hence consumption and saving, raising the question of how the initial level of consumption is sustained in Asia and Europe. That in turn leaves me wondering whether the paper provides any useful lessons for addressing the issue of global imbalances in, say, the coming decade.

Let me offer, in sketchy terms, my own view of the issue. The discussion of the U.S. current account deficit has focused largely on how much adjustment must occur in the United States. The authors' model is properly a general equilibrium model, and so it includes the rest of the world. I will focus on adjustment in the rest of the world.

In 2004 the large current account surpluses in the world were in Japan, at $172 billion, and in Germany and the Netherlands (which can be considered a satellite of the German economy) at $116 billion. Thus these three countries together account for nearly half the U.S. current account deficit. Russia and China together add another $130 billion. These are where the big numbers are. Adding up all of the rest of East Asia accounts for another $110 billion, and OPEC another $100 billion. Then there is the statistical discrepancy, which has grown to about $200 billion.

There is, as always in ex post accounting, a problem of attribution, but if...