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Current account sustainability and relative reliability

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  • Stephanie E. Curcuru
  • Charles P. Thomas
  • Francis E. Warnock
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    Abstract

    The sustainability of the large and persistent U.S. current account deficits is one of the biggest issues currently being confronted by international macroeconomists. Some very plausible theories suggest that the substantial global imbalances can continue in a benign manner, other equally plausible theories predict a disorderly resolution, and in general it is very difficult to discern between competing theories. To inform the debates, we view competing theories through the perspective of the relative reliability of the data the theories rely on. Our analysis of the dark matter theory is cursory; from a relative reliability perspective, it fails as it is built on the assumption that an item that is largely unmeasured is the most accurate component of the entire set of international accounts. Similarly, the best data currently available suggest that U.S. returns differentials are much smaller than implied by the exorbitant privilege theory. Our analysis opens up questions about potential inconsistencies in the international accounts, which we address by providing rough estimates of various holes in the accounts.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 947.

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    Date of creation: 2008
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    Handle: RePEc:fip:fedgif:947

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    Keywords: International finance ; International trade;

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    References

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    1. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "From World Banker to World Venture Capitalist: US External Adjustment and The Exorbitant Privilege," CEPR Discussion Papers 5220, C.E.P.R. Discussion Papers.
    2. John D. Burger & Francis E. Warnock, 2006. "Local Currency Bond Markets," NBER Working Papers 12552, National Bureau of Economic Research, Inc.
    3. Ricardo Hausmann & Federico Sturzenegger, 2007. "The missing dark matter in the wealth of nations and its implications for global imbalances," Economic Policy, CEPR & CES & MSH, vol. 22, pages 469-518, 07.
    4. Guy Meredith, 2007. "Debt Dynamics and Global Imbalances," IMF Working Papers 07/4, International Monetary Fund.
    5. Anna Pavlova & Roberto Rigobon, 2007. "An Asset-Pricing View of External Adjustment," NBER Working Papers 13468, National Bureau of Economic Research, Inc.
    6. Burger, John D. & Warnock, Francis E., 2007. "Foreign participation in local currency bond markets," Review of Financial Economics, Elsevier, vol. 16(3), pages 291-304.
    7. Owen A. Lamont & Jeremy C. Stein, 2004. "Aggregate Short Interest and Market Valuations," NBER Working Papers 10218, National Bureau of Economic Research, Inc.
    8. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2004. "Financial Globalization and Exchange Rates," CEPR Discussion Papers 4745, C.E.P.R. Discussion Papers.
    9. Michele Cavallo & Cedric Tille, 2006. "Could capital gains smooth a current account rebalancing?," 2006 Meeting Papers 252, Society for Economic Dynamics.
    10. Ralph H. Kozlow, 2006. "Statistical Issues Related to Global Economic Imbalances: Perspectives on "Dark Matter"," BEA Papers 0068, Bureau of Economic Analysis.
    11. John Kitchen, 2007. "Sharecroppers or Shrewd Capitalists? Projections of the US Current Account, International Income Flows, and Net International Debt," Review of International Economics, Wiley Blackwell, vol. 15(5), pages 1036-1061, November.
    12. Philip R. Lane & Gian Maria Milesi-Ferretti, 2009. "Where did all the borrowing go? A forensic analysis of the U.S. external position," NBER Chapters, in: Financial Globalization, 20th Anniversary Conference, NBER-TCER-CEPR National Bureau of Economic Research, Inc.
    13. John Ammer & Sara B. Holland & David C. Smith & Francis E. Warnock, 2006. "Look at Me Now: What Attracts U.S. Shareholders?," NBER Working Papers 12500, National Bureau of Economic Research, Inc.
    14. Carol C. Bertaut & Ralph W. Tryon, 2007. "Monthly estimates of U.S. cross-border securities positions," International Finance Discussion Papers 910, Board of Governors of the Federal Reserve System (U.S.).
    15. Frankel, Jeffrey, 2006. "Global Imbalances and Low Interest Rates: An Equilibrium Model vs. A Disequilibrium Reality," Working Paper Series rwp06-035, Harvard University, John F. Kennedy School of Government.
    16. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2008. "Cross-Border Returns Differentials," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1495-1530, November.
    17. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2008. "Cross-border returns differentials," International Finance Discussion Papers 921, Board of Governors of the Federal Reserve System (U.S.).
    18. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2008. "Cross-Border Returns Differentials," NBER Working Papers 13768, National Bureau of Economic Research, Inc.
    19. Carol C. Bertaut & Steven B. Kamin & Charles P. Thomas, 2008. "How long can the unsustainable U.S. current account deficit be sustained?," International Finance Discussion Papers 935, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:
    1. Yeh, Kuo-chun & Ho, Tai-kuang, 2012. "Magnitude and volatility of Taiwan's net foreign assets against Mainland China: 1981–2009," China Economic Review, Elsevier, vol. 23(3), pages 720-728.
    2. Horag Choi & Nelson C. Mark, 2009. "Trending Current Accounts," NBER Working Papers 15244, National Bureau of Economic Research, Inc.

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