A global model of recovery and rebalancing

This paper presents an investigation of global recovery from the Great Recession and the rebalancing of global external imbalances, using a global model of 16 countries and composite regions. The model applies to the short term and only to the real side. Key features are demand-driven output determination, pro-cyclical aggregate labour productivity, imperfect competition in product markets and simple bargaining in non-clearing labour markets, which together determine the functional distribution of income. Trade is modelled 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. Copyright , Oxford University Press.