^*Pietro Cova and Massimiliano Pisani are economists in the Banca d'Italia Research Department; Nicoletta Batini is a senior economist in the IMF Western Hemisphere Department; and Alessandro Rebucci is a senior economist in the IMF Research Department. The authors would like to thank the editors (Bob Flood and Doug Laxton), an anonymous referee, Susanto Basu, Francesco Giavazzi, Luca Guerrieri, Ben Hunt, Ellen McGrattan, Enrique Mendoza, Gian Maria Milesi-Ferretti, Sergio Rebelo, and seminar and conference participants from the Central Banks of Chile and Peru, the University of Surrey, the 2007 IMF Global Economy Modeling Conference, and the 11th CEPR/ESI Annual Conference on "Global Imbalances, Competitiveness and Emerging Markets" for helpful discussions and suggestions on earlier drafts of this paper.

Abstract

This paper investigates the role played by total factor productivity (TFP) in the tradable and nontradable sectors of the United States, the euro area, and Japan in the emergence and evolution of today's global trade imbalances. Simulation results based on a dynamic general equilibrium model of the world economy, and using the new EU KLEMS database, indicate that TFP developments in these economies can account for a significant fraction of the deterioration in the U.S. trade balance since 1998, as well as for some of the surpluses in the euro area and Japan. Differences in TFP developments across sectors can also partially explain the evolution of the real effective value of the U.S. dollar during this period. These results highlight the importance of focusing on productivity developments in the nontradable sector of these large, relatively closed economies to understand the evolution of their trade balance and real exchange rate.