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The end of large current account deficits : 1970-2002 : are there lessons for the United States?

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  • Sebastian Edwards

Abstract

The future of the U.S. current account -- and thus of the U.S. dollar -- depend on whether foreign investors will continue to add U.S. assets to their investment portfolios. However, even under optimistic scenarios, the U.S. current account deficit is likely to go through a significant reversal at some point in time. This adjustment may be as large of 4% to 5% of GDP. In order to have an idea of the possible consequences of this type of adjustment, I have analyzed the international evidence on current account reversals using both non-parametric techniques as well as panel regressions. The results from this empirical investigation indicate that major current account reversals have tended to result in large declines in GDP growth. I also analyze the large U.S. current account adjustment of 1987-1991.

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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): (2005)
Issue (Month): Aug ()
Pages: 205-268

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Handle: RePEc:fip:fedkpr:y:2005:i:aug:p:205-268

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Keywords: Greenspan; Alan ; Interest rates ; Deficit financing;

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  1. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," Research Department Publications 4367, Inter-American Development Bank, Research Department.
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  3. Muge Adalet & Barry Eichengreen, 2007. "Current Account Reversals: Always a Problem?," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 205-246 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Campa, Jose M. & Gavilán, Angel, 2006. "Current accounts in the euro area: An intertemporal approach," IESE Research Papers D/651, IESE Business School.
  2. Jean-Pierre Andre, 2011. "Economic Imbalances: New Zealand's Structural Challenge," Treasury Working Paper Series 11/03, New Zealand Treasury.
  3. Roberto Alvarez, 2011. "Export transitions," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 20(2), pages 221-250.
  4. Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251.
  5. Sebastian Edwards, 2006. "External Imbalances in an Advanced, Commodity-Exporting Country: The Case of New Zealand," NBER Working Papers 12620, National Bureau of Economic Research, Inc.
  6. William D. Craighead & David R. Hineline, 2013. "As the Current Account Turns: Disaggregating the Effects of Current Account Reversals in Industrial Countries," The World Economy, Wiley Blackwell, vol. 36(12), pages 1516-1541, December.
  7. Andrew Filardo, 2009. "Short-Term Policy Responses to the International Financial Crisis and Risks to Sustainable Medium-Term Policy Frameworks in Asia : Complications Arising from Enduring Global Imbalances," EABER Working Papers 22862, East Asian Bureau of Economic Research.
  8. Patrick A. Imam, 2008. "Rapid Current Account Adjustments," IMF Working Papers 08/233, International Monetary Fund.
  9. 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.
  10. Carmen Reinhart & Vincent Reinhart, 2009. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," NBER Chapters, in: NBER International Seminar on Macroeconomics 2008, pages 9-62 National Bureau of Economic Research, Inc.
  11. Campa, Jose Manuel & Gavilan, Angel, 2011. "Current accounts in the euro area: An intertemporal approach," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 205-228, February.

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