This is a Working Paper and the author would welcome any comments on the present text. Citations should refer to a Working Paper of the International Monetary Fund, mentioning the author, and the date of issuance. The views expressed are those of the author and do not necessarily represent those of the Fund.

This Occasional Paper collects various pieces of analysis that were prepared during 1995-97 in association with the efforts of the Coordinating Group on Exchange Rate Issues (CGER), a technical working group in which members of a number of the Fund's departments participate. CGER was formally established in the spring of 1995, under the co-chairmanship of representatives from the Policy Development and Review Department (PDR) and the Research Department (RES). The PDR co-chair position during 1995-97 was held by Owen Evans through May 1997, and Roger Nord thereafter; RES co-chairs were Peter Clark, through August 1995, and subsequently Peter Isard. The general direction of CGER's analytic work has been guided mainly by Stanley Fischer, the First Deputy Managing Director of the Fund, and by Michael Mussa, the Economic Counsellor and Director of RES. Valuable guidance has also been provided by Jack Boorman, Director of PDR, and by the directors and deputy directors of the Fund's area departments, Fiscal Affairs Department, and Monetary and Exchange Affairs Department. In addition, the study has benefited from comments and suggestions by the Executive Directors of the Fund, who held a seminar in October 1997 to discuss an earlier draft of the material in Sections I-III.Much of the analytic work for this study has been conducted in the Economic Modeling and External Adjustment Division (EMEAD) of the Research Department, under the supervision of Peter Isard. Current and former members of EMEAD who have been actively involved in developing the analytic framework include Tamim Bayoumi, Guy Debelle, Hamid Faruqee, Thomas Krueger, and Steven Symansky. The study also includes chapters prepared by Robert Kahn and Roger Nord, Guy Meredith, and Paul Masson. Thomas Krueger provided many constructive suggestions on Section II, and at various stages these and other chapters have also benefited substantially from the comments and reactions of Peter Clark and other CGER members, including

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This paper re-examines the implications, risks, and attendant policies surrounding global rebalancing of current accounts through the lens of a dynamic, multi-region model of the global economy. In the baseline scenario, world macroeconomic imbalances of the early 2000s can be attributed to a combination of six related but distinct tendencies: (i)expansionary U.S. fiscal policy, (ii) declining rate of U.S. private savings, (iii) increased foreign demand for U.S. assets, particularly in Asia, (iv) strong productivity growth in emerging Asia, (v) lagging productivity growth in Japan and the euro area, and (vi) gaining export competitiveness in emerging Asia. The baseline projects stabilizing U.S. public and foreign debt (albeit at higher levels) and a gradual depreciation of the dollar, allowing the U.S. external deficit to gradually move to a sustainable level. An alternative scenario, involving a sudden portfolio reshuffling in the rest of the world, would result in higher U.S. real interest rates, a significantly weaker dollar, with harmful effects on U.S. (and possibly global) growth. More flexible exchange rates in emerging Asia can help reduce variability in both regional output and inflation. Other simulations consider the effects of U.S. fiscal adjustment, as well as growth-enhancing structural reforms in Europe and Japan.

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