Prospects for Global Trade Imbalances

Abstract

There is an unusual degree of uncertainty in early 1988 regarding the economic prospects of the major industrial economies. The puzzles in understanding the economic landscape abound. Was the worldwide stock market crash a signal "that something is seriously wrong in the world economy", as an international group of economists has recently maintained, or was it more simply a dramatic correction of speculative excesses of the previous twelve monthes? After all, despite the crash, the U.S. equity markets were slightly higher at the end of 1987 than 1986, and Japanese equities were significantly higher. Also puzzling is the behavior of trade balances and exchange rates. The dollar is now back to its 1980 levels vis-à-vis a basket of competing currencies, and yet the U.S. trade deficit remains at an all-time high. Is a correction "just around the corner", or has there been a more fundamental loss of U.S. competitiveness in recent years that will require yet a further decline in the dollar?