Americaâ€™s Deficit, the Worldâ€™s Problem
AbstractThe United States deficit on current account, now running at an annual rate of over $700 billion, has reached levels (as a percent of U.S. GDP) not seen since the first decades of the nineteenth century. The deficit is soaking up roughly three-quarters of the world's available external surpluses. Were the deficit to continue at this pace, the U.S. could ultimately converge to an external debt/GDP ratio around 1. Several analyses suggest that a rapid adjustment of the deficit toward balance would require a very sharp real depreciation of the U.S. dollar. This paper reviews the limitations of some optimistic arguments that predict instead a "soft landing" for the dollar. I focus in particular on the view that greater financial globalization allows the U.S. easily to run much bigger deficits for much longer periods. Some simple calculations based on real interest rate differentials suggest that markets could be underestimating the extent of necessary dollar depreciation.
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Bibliographic InfoPaper 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 qt7j3436bf.
Date of creation: 01 Jun 2005
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Current account adjustment; international capital flows; exchange rates;
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