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Global Imbalances: Globalization, Demography, and Sustainability

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  • Richard N. Cooper
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    Abstract

    The current account deficit of the United States has been large in recent years, both in absolute size and relative to GDP. In 2006, it reached $811 billion, 6.1 percent of GDP. It has become a dominant feature of the world economy; if you sum up the current account deficits of all nations that are running deficits in the world economy, the U.S. deficit accounts for about 70 percent of the total. This paper looks beyond the national income accounting relationships to offer a more complex view of the U.S. imbalance. I argue that the generally rising U.S. trade deficit over the last 10-15 years is a natural outcome of two important forces in the world economy -- globalization of financial markets and demographic change -- and therefore that the U.S. current account deficit is likely to remain large for at least a decade. In a globalized market, the United States has a comparative advantage in producing marketable securities and in exchanging low-risk debt for higher-risk equity. It is not surprising that savers around the world want to put a growing portion of their savings into the U.S. economy. I argue that serious efforts to reduce the U.S. deficit, even collaborative efforts with other countries, may well precipitate a financial crisis and an economic downturn every bit as severe as the one that many fear could result from a disorderly market adjustment to the trade deficit.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.22.3.93
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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: 93-112

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    Handle: RePEc:aea:jecper:v:22:y:2008:i:3:p:93-112

    Note: DOI: 10.1257/jep.22.3.93
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    References

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    1. Richard H. Clarida, 2007. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Books, National Bureau of Economic Research, Inc, number clar06-2.
    2. Caballero, Ricardo J & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2006. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," Center for International and Development Economics Research, Working Paper Series qt7xc0g8mm, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    3. Pierre-Olivier Gourinchas & Helene Rey, 2005. "International Financial Adjustment," NBER Working Papers 11155, National Bureau of Economic Research, Inc.
    4. Pol Antràs & Ricardo J. Caballero, 2009. "Trade and Capital Flows: A Financial Frictions Perspective," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 701-744, 08.
    5. Carol Corrado & Charles Hulten & Daniel Sichel, 2006. "Intangible capital and economic growth," Finance and Economics Discussion Series 2006-24, Board of Governors of the Federal Reserve System (U.S.).
    6. Olivier Blanchard & Francesco Giavazzi & Filipa Sa, 2005. "International Investors, the U.S. Current Account, and the Dollar," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 1-66.
    7. Ricardo J. Caballero, 2006. "On the Macroeconomics of Asset Shortages," NBER Working Papers 12753, National Bureau of Economic Research, Inc.
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    Cited by:
    1. 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.
    2. Bosworth, Barry & Flaaen, Aaron, 2009. "America's Financial Crisis: The End of an Era," ADBI Working Papers 142, Asian Development Bank Institute.
    3. Fratzscher, Marcel, 2009. "What explains global exchange rate movements during the financial crisis?," Working Paper Series 1060, European Central Bank.
    4. Andrea Fracasso & Stefano Schiavo, 2009. "Trade-imbalances networks and exchange rate adjustments: the paradox of a new Plaza. The XIVth Spring Meeting of Young Economists (SMYE-2009), Istanbul, April 2009," Sciences Po publications info:hdl:2441/10028, Sciences Po.
    5. Fracasso, Andrea & Schiavo, Stefano, 2009. "Global imbalances, exchange rates adjustment and the crisis: Implications from network analysis," Journal of Policy Modeling, Elsevier, vol. 31(5), pages 601-619, September.
    6. Pomfret, Richard, 2010. "The financial sector and the future of capitalism," Economic Systems, Elsevier, vol. 34(1), pages 22-37, March.
    7. 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.
    8. Özlale, Ümit & Pekkurnaz, Didem, 2010. "Oil prices and current account: A structural analysis for the Turkish economy," Energy Policy, Elsevier, vol. 38(8), pages 4489-4496, August.
    9. Hongyi Chen & Lars Jonung & Olaf Unteroberdoerster, 2009. "Lessons for China from financial liberalization in Scandinavia," European Economy - Economic Papers 383, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

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