Current Accounts and National Savings: Rebalancing Demand in China

The persistence of global current account imbalances in the last decade has highlighted the importance of examining and understanding the causes of imbalances. Although generally studied as a macroeconomic phenomenon, changes to the current account may have effects on the microeconomy that warrant examination. This paper uses an applied microeconomic general equilibrium model to examine changes to current account imbalances existing between the U.S. and China. The microeconomic effects of a rebalancing of domestic demand in China that lessens the current account surplus and generates a real appreciation of the renminbi are analyzed. The U.S. current account deficit narrows in response to the real appreciation of the renminbi, but further analysis demonstrates a small rise in the U.S. national savings rate will generate a larger current account adjustment. The analysis has implications for global current account imbalances, as it is seen that the largest reductions in imbalances may stem from actions in both surplus and deficit countries.