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How Long Can the Unsustainable U.S. Current Account Deficit Be Sustained?

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  • Carol C Bertaut
  • Steven B Kamin
  • Charles P Thomas
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    Abstract

    This paper addresses three questions about prospects for the U.S. current account deficit. First, is it sustainable in the long term? Projections of a detailed model of the U.S. balance of payments suggest that the current account deficit will resume widening and external indebtedness will continue to expand. Second, how long will it take for indebtedness to rise sufficiently to prompt some pullback by global investors? We project that external debt, net investment income, and the share of U.S. claims in foreigners’ portfolios will take many years to reach levels that would test global investors’ willingness to extend financing. Finally, if and when levels of sustainable debt burden are breached, how readily would asset prices respond and the current account start to narrow? We find little evidence that, as countries’ indebtedness rises, the changes in asset prices and exchange rates needed to correct the current account materialize all that rapidly. IMF Staff Papers (2009) 56, 596–632. doi:10.1057/imfsp.2009.7; published online 26 May 2009

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

    Volume (Year): 56 (2009)
    Issue (Month): 3 (August)
    Pages: 596-632

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    Handle: RePEc:pal:imfstp:v:56:y:2009:i:3:p:596-632

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