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Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate

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  • Martin Feldstein

Abstract

The massive deficit in the U.S. trade and current accounts is one of the most striking features of the current global economy and, to some observers, one of the most worrying. Although the current account deficit finally began to shrink in 2007, it remained at more than 5 percent of GDP -- more than $700 billion. While some observers claim that the U.S. economy can continue to have trade deficits of this magnitude for years -- some would say for decades -- into the future, I believe that such enormous deficits cannot continue and will decline significantly in the coming years. This paper discusses the reasons for that decline and the changes that are needed in the U.S. saving rate and in the value of the dollar to bring it about. Reducing the U.S. current account deficit does not require action by the U.S. government or by the governments of America's trading partners. Market forces alone will cause the U.S. trade deficit to decline further. In practice, however, changes in government policies at home and abroad may lead to faster reductions in the U.S. trade deficit. More important, the response of the U.S. and foreign governments and central banks will determine the way in which the global economy as a whole adjusts to the decline in the U.S. trade deficit. Reductions in the U.S. current account deficit will of course imply lower aggregate trade surpluses in the rest of the world. Taken by itself, a reduction in any country's trade surplus will reduce aggregate demand and therefore employment in that country. I will therefore look at what other countries -- China, Japan, and European countries -- can do to avoid the adverse consequences of the inevitable decline of the U.S. trade deficit.

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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 22 (2008)
Issue (Month): 3 (Summer)
Pages: 113-25

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Handle: RePEc:aea:jecper:v:22:y:2008:i:3:p:113-25

Note: DOI: 10.1257/jep.22.3.113
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References

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  1. Martin Feldstein, 2006. "The 2006 Economic Report of the President: Comment on Chapter One (The Year in Review) and Chapter Six (The Capital Account Surplus)," NBER Working Papers 12168, National Bureau of Economic Research, Inc.
  2. Robert J. Shiller, 2007. "Understanding Recent Trends in House Prices and Home Ownership," NBER Working Papers 13553, National Bureau of Economic Research, Inc.
  3. David Dollar & Shang-Jin Wei, 2007. "Das (Wasted) Kapital: Firm Ownership and Investment Efficiency in China," NBER Working Papers 13103, National Bureau of Economic Research, Inc.
  4. John B. Taylor, 2007. "Housing and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 463-476.
  5. Martin Feldstein, 2005. "Monetary Policy in a Changing International Environment: The Role of Global Capital Flows," NBER Working Papers 11856, National Bureau of Economic Research, Inc.
  6. David Dollar & Shang-Jin Wei, 2007. "Das (Wasted) Kapital," IMF Working Papers 07/9, International Monetary Fund.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Far Too Low for Far Too Long
    by JW Mason in Rortybomb on 2012-04-07 14:19:15
  2. Far Too Low for Far Too Long
    by JW Mason in Rortybomb on 2012-04-06 04:31:17
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Cited by:
  1. Marcus Kappler & Helmut Reisen & Moritz Schularick & Edouard Turkisch, 2013. "The Macroeconomic Effects of Large Exchange Rate Appreciations," Open Economies Review, Springer, vol. 24(3), pages 471-494, July.
  2. Chevallier, Julien, 2012. "Global imbalances, cross-market linkages, and the financial crisis: A multivariate Markov-switching analysis," Economic Modelling, Elsevier, vol. 29(3), pages 943-973.
  3. Ahmed, Khalid & Long, Wei, 2012. "An Analysis of Core Factors Contributing to U.S – China Trade Imbalance," MPRA Paper 44733, University Library of Munich, Germany.
  4. Salotti, Simone, 2008. "Global imbalances and household savings: the role of wealth," MPRA Paper 17729, University Library of Munich, Germany, revised 2009.
  5. Chris Hunt, 2008. "Financial turmoil and global imbalances: the end of Bretton Woods II?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 71, September.
  6. Joshua Aizenman & Yothin Jinjarak & Nancy P. Marion, 2013. "China's Growth, Stability, and Use of International Reserves," NBER Working Papers 19739, National Bureau of Economic Research, Inc.
  7. Krause, Michael & Hoffmann, Mathias & Laubach, Thomas, 2013. "The Expectations-Driven U.S. Current Account," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79854, Verein für Socialpolitik / German Economic Association.
  8. Vincent C.S. Lim & Victor Pontines, 2012. "Global Imbalances: A Primer," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp86, June.
  9. Smith, Constance E., 2011. "External balance adjustment: An intra-national and international comparison," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1195-1213, October.
  10. Pancaro, Cosimo, 2013. "Current account reversals in industrial countries: does the exchange rate regime matter?," Working Paper Series 1547, European Central Bank.
  11. Hoffmann, Mathias & Krause, Michael U. & Laubach, Thomas, 2011. "Long-run growth expectations and "global imbalances"," CFS Working Paper Series 2011/01, Center for Financial Studies (CFS).
  12. Franziska Ohnsorge & Ashoka Mody, 2010. "After the Crisis," IMF Working Papers 10/11, International Monetary Fund.
  13. Gunther Schnabl & Stephan Freitag, 2012. "Determinants of Global and Intra-European Imbalances," Global Financial Markets Working Paper Series 25-2011, Friedrich-Schiller-University Jena.

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