A reduction in the U.S. current account deficit vis-a-vis emerging
Asia involves a shift in demand from U.S. to emerging Asia tradable
goods and a change in international relative prices. This paper
quantifies the required adjustment in the terms of trade and real
exchange rates in a three-country open economy model of the U.S.,
China, and other emerging Asia. We compare scenarios where both
Chinese and other emerging Asian export prices change by the same
proportion to the case where export prices remain constant in one
country and increase in the other. Our results are robust to
different assumptions about elasticities of substitution and to
introducing a high degree of vertical fragmentation in production
in the model."
International Monetary Fund
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