Global Imbalances and Structural Change in the United States

The United States has borrowed heavily from the rest of the world since the early 1990s. We build a model where this borrowing is driven by foreign demand for saving – a global savings glut – that matches the dynamics of the U.S. trade balance, real exchange rate, sector-level trade balances, and reallocation of labor across sectors. We use our model to study what will happen when the savings glut ends. The U.S. will run a permanent trade surplus and its real exchange rate will depreciate substantially, but goods sector employment will continue to fall. A sudden stop will cause a sharp trade balance reversal, large real exchange rate depreciation, and painful reallocation across sectors but will have little lasting impact on the U.S. economy’s trajectory.