The object of this research is to analyse the relationship between current account imbalances and exchange rate. In particular, the aim of this paper is to investigate the case of the US current account deficit. The origins of the US external deficit – around 6.4% of GDP in 2006- the timing of the adjustment and the policy implications, are all sources of a widespread debate. At the centre of the debate there are two issues the one of the required adjustment in the dollar exchange rates for global rebalancing and/or the one of the likelihood of currency crisis occurrence in the US. In this research we start from the assumption that sooner or later the US imbalances have to be corrected. We perform some simulation exercises trying to evaluate what is going to be the different effectiveness of the adjustment mechanisms and what is going to be the impact of such an adjustment on the main countries.

According to our simulations the correction of the US current account deficit through a depreciation of the nominal dollar exchange rate of the 10% would not be of great entity, in spite of a “second round effect” due to the increase of the fed funds rate to contain inflation. The cost of the adjustment would be paid mainly by China. In fact, because of the high percentage of exports as GDP components, the Chinese economy would be penalised by the loss of competitiveness due to the depreciation of the dollar exchange rate. The effects on euro area GDP, under the assumption of a BCE reaction to the euro appreciation, would be lower but not to neglect.

A fiscal policy adjustment process would improve the federal government account but the effect on the current account deficit would be lesser than the one obtained through the exchange rate adjustment and more costly for US. However the adjustment cost for the other industrialised countries would be very low.