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The Unsustainable US Current Account Position Revisited

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Author Info
Maurice Obstfeld (University of California, Berkeley and CEPR and NBER)
Kenneth Rogoff (Harvard University)

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Abstract

Keywords: US current account deficit, external imbalance, net foreign assets, real exchange rate, sustainability JEL Codes: F21, F32, F36, F41ABSTRACT:We show that the when one takes into account the global equilibrium ramifications of an unwinding of the US current account deficit, currently running at more than 6% of GDP, the potential collapse of the dollar becomes considerably larger than our previous estimates (Obstfeld and Rogoff 2000a)--as much as 30% or even higher. It is true that global capital market deepening appears to have accelerated over the past decade (a fact documented by Lane and Milesi-Ferreti (2003, 2004) and recently emphasized by outgoing US Federal Reserve Chairman Alan Greenspan), and that this deepening may have helped allowed the United States to a recordbreaking string of deficits. Unfortunately, however, global capital market deepening turns out to be of only modest help in mitigating the dollar decline that will almost inevitably occur in the wake of global current account adjustment. As the analysis of our earlier papers (2000a,b) showed, and the model of this paper reinforces, adjustments to large current account shifts depend mainly on the flexibility and global integration of goods and factor markets. Whereas the dollar's decline may be benign as in the 1980s, we argue that the current conjuncture more closely parallels the early 1970s, when the Bretton Woods system collapsed. Finally, we use our model to dispel some common misconceptions about what kinds of shifts are needed to help close the US current account imbalance. For example, faster growth abroad helps only if it is relatively concentrated in nontradable goods; faster productivity growth in foreign tradable goods will actually exacerbate the US adjustment problem.

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Paper provided by Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley in its series Center for International and Development Economics Research, Working Paper Series with number 1063.

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Date of creation: 30 Nov 2005
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Handle: RePEc:cdl:ciders:1063

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Related research
Keywords: US current account deficit; external imbalance; net foreign assets; real exchange rate; sustainability;

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  1. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The revived Bretton Woods system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 307-313. [Downloadable!]
  2. Maurice Obstfeld & Kenneth Rogoff, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Working Papers 7777, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics. [Downloadable!]
  5. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "International Financial Adjustment," CEPR Discussion Papers 4923, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Robert J. Gordon, 2004. "Two Centuries of Economic Growth: Europe Chasing the American Frontier," NBER Working Papers 10662, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2003. "Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons," NBER Working Papers 9828, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Tille, Cédric, 2008. "Financial integration and the wealth effect of exchange rate fluctuations," Journal of International Economics, Elsevier, vol. 75(2), pages 283-294, July. [Downloadable!] (restricted)
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  9. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2004. "Financial Globalization and Exchange Rates," CEPR Discussion Papers 4745, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Charles Engel, 1999. "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 507-538, June. [Downloadable!] (restricted)
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  12. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?," NBER Working Papers 11541, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2005-1), pages 67-146. [Downloadable!]
  14. Warnock, Francis E., 2003. "Exchange rate dynamics and the welfare effects of monetary policy in a two-country model with home-product bias," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 343-363, June. [Downloadable!] (restricted)
  15. Cedric Tille, 2003. "The impact of exchange rate movements on U.S. foreign debt," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Jan. [Downloadable!]
  16. Maurice Obstfeld & Kenneth Rogoff, 2000. "Perspectives on OECD economic integration : implications for U.S. current account adjustment," Proceedings, Federal Reserve Bank of Kansas City, pages 169-208. [Downloadable!]
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  17. Joseph E. Gagnon, 2003. "Productive capacity, product varieties, and the elasticities approach to the trade balance," International Finance Discussion Papers 781, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  18. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2003. "International Financial Integration," CEPR Discussion Papers 3769, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  20. Hilary Croke & Steven B. Kamin & Sylvain Leduc, 2005. "Financial market developments and economic activity during current account adjustments in industrial economies," International Finance Discussion Papers 827, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  21. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries," NBER Working Papers 10332, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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