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Abstract:
This paper presents an empirical analysis of the progress in U.S. external adjustment through 1988 and prospects for continued adjustment over the years ahead. Our analysis, based in part on a partial-equilibrium model of the U.S. current account, suggests that adjustment was slower than "expected" during 1986-87, and faster than expected during the first half of 1988. The model was about "on track" in the second quarter of 1988, but did not anticipate the drop off in the trade balance in the second half of the year. We consider various model extrapolations of the U.S. external balance with exchange rates and income growth rates held unchanged. Our model, as well as those of other researchers, indicate that the U.S. external balance will narrow somewhat further during 1989, but will begin to widen again thereafter. This view may be overly pessimistic, due to some limitations of the models. In order to assess the credibility of these projections, we consider the issue of model uncertainty and construct error bands around the model projections using stochastic simulation techniques.
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