A global model of recovery and rebalancing

This paper presents an investigation of global recovery from the great recession and rebalancing of global external imbalances, using a global model of sixteen countries and composite regions. The model applies to the short run, and only to the real side. Key features are demand-driven output determination, pro-cyclical aggregate labor productivity, imperfect competition in product markets and simple bargaining in non-clearing labor markets, which together determine the functional distribution of income. Trade is modeled in a bilateral import matrix; particular attention is paid to international adjustment. Simulation results suggest that early exit from fiscal support threatens a fragile recovery. Further, domestic demand expansion and revaluation in real terms in surplus countries are necessary for rebalancing, and a variety of measures can be employed to achieve these goals.