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Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate

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  • Feldstein, Martin
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    Abstract

    The massive deficit in the U.S. trade and current accounts is one of the most striking features of the current global economy and, to some observers, one of the most worrying. Although the current account deficit finally began to shrink in 2007, it remained at more than 5 percent of GDP—more than $700 billion. While some observers claim that the U.S. economy can continue to have trade deficits of this magnitude for years—some would say for decades—into the future, I believe that such enormous deficits cannot continue and will decline significantly in the coming years. This paper discusses the reasons for that decline and the changes that are needed in the U.S. saving rate and in the value of the dollar to bring it about. Reducing the U.S. current account deficit does not require action by the U.S. government or by the governments of America's trading partners. Market forces alone will cause the U.S. trade deficit to decline further. In practice, however, changes in government policies at home and abroad may lead to faster reductions in the U.S. trade deficit. More important, the response of the U.S. and foreign governments and central banks will determine the way in which the global economy as a whole adjusts to the decline in the U.S. trade deficit. Reductions in the U.S. current account deficit will of course imply lower aggregate trade surpluses in the rest of the world. Taken by itself, a reduction in any country's trade surplus will reduce aggregate demand and therefore employment in that country. I will therefore look at what other countries—China, Japan, and European countries—can do to avoid the adverse consequences of the inevitable decline of the U.S. trade deficit.

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    File URL: http://dash.harvard.edu/bitstream/handle/1/2792081/feldstein_resolving.pdf
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    Bibliographic Info

    Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 2792081.

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    Date of creation: 2008
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    Publication status: Published in Journal of Economic Perspectives
    Handle: RePEc:hrv:faseco:2792081

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    Cited by:
    1. Kappler, Marcus & Reisen, Helmut & Schularick, Moritz & Turkisch, Edouard, 2011. "The macroeconomic effects of large exchange rate appreciations," Discussion Papers 2011/3, Free University Berlin, School of Business & Economics.
    2. Hoffmann, Mathias & Krause, Michael & Laubach, Thomas, 2011. "Long-run growth expectations and 'global imbalances'," Discussion Paper Series 1: Economic Studies 2011,01, Deutsche Bundesbank, Research Centre.
    3. Smith, Constance, 2011. "External Balance Adjustment: An Intra-National and International Comparison," Working Papers 2011-13, University of Alberta, Department of Economics.
    4. Salotti, Simone, 2008. "Global imbalances and household savings: the role of wealth," MPRA Paper 17729, University Library of Munich, Germany, revised 2009.
    5. Joshua Aizenman & Yothin Jinjarak & Nancy Marion, 2014. "China’s Growth, Stability, and Use of International Reserves," Open Economies Review, Springer, vol. 25(3), pages 407-428, July.
    6. Pancaro, Cosimo, 2013. "Current account reversals in industrial countries: does the exchange rate regime matter?," Working Paper Series 1547, European Central Bank.
    7. Chevallier, Julien, 2012. "Global imbalances, cross-market linkages, and the financial crisis: A multivariate Markov-switching analysis," Economic Modelling, Elsevier, vol. 29(3), pages 943-973.
    8. Gunther Schnabl & Stephan Freitag, 2012. "Determinants of Global and Intra-European Imbalances," Global Financial Markets Working Paper Series 25-2011, Friedrich-Schiller-University Jena.
    9. Vincent C.S. Lim & Victor Pontines, 2012. "Global Imbalances: A Primer," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp86, June.
    10. Krause, Michael & Hoffmann, Mathias & Laubach, Thomas, 2013. "The Expectations-Driven U.S. Current Account," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79854, Verein für Socialpolitik / German Economic Association.

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