List of References
Arora, V., S. Dunaway, and H. Faruqee, 2001, “Sustainability of the U.S. Current Account Deficit,” IMF Country Report 01/149, August.
Laxton, D., Isard, P., Faruqee, H., Prasad, E. and Turtelboom, B. 1998, “MULTIMOD Mark III: The Core Dynamic and Steady-State Models,” IMF Occasional Paper No. 164.
Mann, C., 2002, “Perspectives on the U.S. Current Account Deficit and Sustainability,” Journal of Economic Perspectives, forthcoming.
Prepared by Benjamin Hunt.
A modified Mark IIIB version of MULTIMOD is used, in which the uncovered interest parity condition that determines exchange rate behavior is amended so that agents5089/expectations of the one-period-ahead exchange rate is modeled as a weighted combination of the previous period5089/s exchange rate (weight of 0.45) and the model-consistent one-period-ahead exchange rate (weight of 0.55). Further, an additional term is added to the parity condition to capture some of the impact of changes in the marginal product of capital. For a detailed presentation of the structure of MULTIMOD Mark III see Laxton and others (1998).
The recent performance of the U.S. economy is almost certainly the result of a far more complex set of factors than those considered here. Even if relative productivity growth and the risk premium have played an important part, there are undoubtedly many other factors that have contributed and these simulations should be evaluated in this light.
In the sixth year productivity growth increases by 25 basis points in other industrial countries. The acceleration increases by 25 basis points in each of the subsequent three years until productivity growth has accelerated to 1 percent above baseline. With each 25 basis point increase in productivity growth outside the United States, the initial decline in the risk premium demanded on U.S. assets is reversed by 25 basis points. Once productivity growth is equal in the United States and other industrial countries, the risk premiums demanded on assets are identical for all industrial countries. In the long run, the increase in the level of productivity is identical for all industrial countries.