List of References
Cerisola, M., H. Faruqee, and A. Keenan, 1999, “Long-Term Sustainability of the U.S. Current Account Balance,” in United Slates—Selected Issues, IMF Staff Country Report No. 99/101.
Goldstein, M., and M. Khan, 1985, “Income and Price Elasticities in Foreign Trade,” in Ronald Jones and Peter Kenen, editors, Handbook of International Economics, 2, (Amsterdam: North Holland), pp. 1041–1105.
Houthakker, H., and S. Magee, 1969, “Income and Price Elasticities in World Trade,” Review of Economics and Statistics, 51, pp. 111–125.
Krugman, P., 1989, “Differences in Income Elasticities and Trends in Real Exchange Rates,” in European Economic Review, 33, pp. 1031–1054.
Obstfeld, M., and K. Rogoff, 2000, “Perspectives on OECD Economic Integration: Implications for U.S. Current Account Adjustment,” paper presented at the Federal Reserve Bank of Kansas City symposium, August.
Prepared by Vivek Arora, Steven Dunaway, and Hamid Faruqee.
The productivity shock consists of a roughly ¼ percentage point increase in the rate of total factor productivity (TFP) growth and an exogenous 1–2 percent increase in the market value of capital relative to their respective baseline values. The shocks are perceived to be permanent on impact, before dissipating over a period of five years. The reason for adopting a composite shock in the scenario is that a simple TFP shock alone in MULTIMOD does not raise investment significantly relative to consumption. The second component—an additional increase in the market value of capital—raises domestic returns sufficiently to spur domestic investment to a much greater extent, as well as to induce capital inflows and a currency appreciation, in a manner similar to the experience in the United States during the second half of the 1990s.
The results are similar if instead U.S. productivity levels fall to levels prevailing in partner countries.
See Krugman (1989). Krugman refers to the relationship between relative trade income elasticities and relative growth rates as the “45-degree rule.”
In the export and import equations, real income was captured by real foreign and U.S. GDP, respectively, and relative prices by the ratio of U.S. export prices to the foreign import-weighted consumer price index and the ratio of U.S. import prices to the U.S. GDP deflator. The export price elasticities are very low, and not significant at the 5 percent level for 1975–2000. An alternative specification using the foreign export deflator in place of the foreign CPI suggested that the elasticity of U.S. exports with respect to relative prices was -0.7 during 1975–2000.
For actuarial balance, it was assumed that Social Security and Medicare HI payroll taxes are raised such that the present value of expenditures over the 75-year horizon is not larger than the net present value of revenues, and that the trust funds have sufficient resources to cover expenditure for an additional year. See also Cerisola, Faruqee, and Keenan (1999).