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WORKING PAPER 05-6

Postponing Global Adjustment: An Analysis of the Pending Adjustment of Global Imbalances

by Edwin M. Truman, Peterson Institute for International Economics

Halving the US current account deficit as a share of GDP is likely to impose a burden of $2,350 per capita on the United States, which explains why US policymakers want to postpone adjustment. The rest of the world relies on a widening US external deficit for economic stimulus, which explains why it is not eager for global adjustment. The paper examines three scenarios of exchange rate adjustments, calls on the Federal Reserve to take more account of the external deficit in its words and policy actions, and familiarly notes the need for US fiscal adjustment as part of an efficient adjustment process. Complementary policies are required in the rest of the world. Truman also proposes an international reserve diversification standard to remove some of the uncertainty about the management of foreign exchange reserves.

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