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Perspectives on OECD economic integration : implications for U.S. current account adjustment

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  • Maurice Obstfeld
  • Kenneth Rogoff

Abstract

The US current account deficit has been persistently large and has brought the country's ratio of foreign debt to GDP to 20%, a figure that is high by historical standards. This paper argues that while US solvency is not a near-term constraint on ongoing deficits, the sheer size of the US economy makes it likely that its current account will have to approach balance in the next five to ten years, if not sooner. The paper surveys a wide body of evidence suggesting that the US economy remains surprisingly closed to external trade in products and capital, and suggests that costs of international trade in goods can explain the evidence. Given the trade costs, a substantial real depreciation of the dollar will be needed to close the US current account gap. If current- account adjustment is gradual, then the medium-term depreciation of the dollar would be on the order of 12%. If the current account deficit is eliminated in a precipitous and disorderly fashion, and the Fed attempts to maintain full employment, the depreciation could be much bigger, even on the order of 40% to 50%.

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Bibliographic Info

Article provided by Federal Reserve Bank of Kansas City in its journal Proceedings - Economic Policy Symposium - Jackson Hole.

Volume (Year): (2000)
Issue (Month): ()
Pages: 169-208

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Handle: RePEc:fip:fedkpr:y:2000:p:169-208

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Keywords: Organisation for Economic Co-operation and Development;

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  1. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
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