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The Unloved Dollar StandardFrom Bretton Woods to the Rise of China$
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Ronald I. McKinnon

Print publication date: 2012

Print ISBN-13: 9780199937004

Published to Oxford Scholarship Online: January 2013

DOI: 10.1093/acprof:oso/9780199937004.001.0001

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The Transfer Problem in Reducing the U.S. Current-Account Deficit

The Transfer Problem in Reducing the U.S. Current-Account Deficit

(p.135) Chapter 9 The Transfer Problem in Reducing the U.S. Current-Account Deficit
The Unloved Dollar Standard

Ronald I. McKinnon

Oxford University Press

Correcting global trade imbalances is a form of the transfer problem: spending must be transferred from trade-deficit countries (mainly the United States) to trade-surplus countries. Reducing the U.S. current account deficit requires that net saving, i.e., saving minus investment) be increased in the United States and reduced abroad—particularly in Asia. But contrary to most literature on the subject, exchange rates need not, and probably best not, be changed as part of the transfer process for improving the U.S. trade balance. To show why this is so, the chapter draws on the older literature on the transfer problem associated with paying war reparations. Adjustment in absorption, i.e., aggregate spending, is two-sided because the loser (the transferor) must raise taxes to pay an indemnity to the winner (the transferee), which then spends it. But there is no presumption that the terms of trade must turn against the transferor. That is, the losing country, which is forced into running a trade surplus (or smaller deficit), need not depreciate its real exchange rate to effect the transfer.

Keywords:   transfer problem, war reparations, absorption adjustment, real exchange rate

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