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Fundamentals At Odds? T+L4130he U.S. Current Account Deficit and the Dollar

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  • Gian-Maria Milesi-Ferretti

Abstract

The real effective exchange rate of the dollar is close to its minimum level for the past 4decades (as of September 2008). At the same time, however, the U.S. trade and currentaccount deficits remain large and, absent a significant correction in coming years, wouldcontribute to a further accumulation of U.S. external liabilities. The paper discusses thetension between these two aspects of the dollar assessment, and what factors can helpreconcile them. It focuses in particular on the terms of trade, adjustment lags, andmeasurement issues related to both the real effective exchange rate and the current accountbalance.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/260.

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Length: 29
Date of creation: 01 Nov 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/260

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Keywords: Current account; Terms of trade; Adjustment process; exchange rate; current account balance; effective exchange rate; real effective exchange rate; trading partners; current account deficit; external position; oil prices; exchange rates; trade flows; exchange rate changes; import prices; exchange rate indices; balance of payments; exchange rate index; trade deficit; real exchange rate; real effective exchange rates; exchange rate fluctuations; effective exchange rates; commodity prices; world output; nominal effective exchange rate; exchange rate valuation; exchange rate appreciation; trade deficits; real exchange rates; economic integration; equilibrium model; exchange rate data; trade partners; world markets; changes in trade; trade growth; world economy; international trade; dollar exchange rate; exchange rate adjustment; nominal exchange rate; bilateral trade; exchange rate level; trading partner; export prices; exchange rate depreciation; trade patterns; imported inputs; export volumes; border trade; partner countries; real exchange rate depreciation; exchange rate shocks; net exports; political economy; aggregate demand; exchange rate developments; volume of trade;

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  1. Chinn, Menzie D. & Lee, Jaewoo, 2009. "Three current account balances: A "Semi-Structuralist" interpretation," Japan and the World Economy, Elsevier, vol. 21(2), pages 202-212, March.
  2. Richard N. Cooper, 2008. "Global Imbalances: Globalization, Demography, and Sustainability," Journal of Economic Perspectives, American Economic Association, vol. 22(3), pages 93-112, Summer.
  3. Chen, Yu-chin & Rogoff, Kenneth, 2003. "Commodity currencies," Journal of International Economics, Elsevier, vol. 60(1), pages 133-160, May.
  4. Hilary Croke & Steven B. Kamin & Sylvain Leduc, 2006. "An Assessment of the Disorderly Adjustment Hypothesis for Industrial Economies," International Finance, Wiley Blackwell, vol. 9(1), pages 37-61, 05.
  5. Samuel Kortum & Jonathan Eaton & Robert Dekle, 2007. "Unbalanced Trade," 2007 Meeting Papers 921, Society for Economic Dynamics.
  6. Backus, David K. & Crucini, Mario J., 2000. "Oil prices and the terms of trade," Journal of International Economics, Elsevier, vol. 50(1), pages 185-213, February.
  7. 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.).
  8. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock, 2008. "Current Account Sustainability and Relative Reliability," NBER Working Papers 14295, National Bureau of Economic Research, Inc.
  9. Cashin, Paul & Cespedes, Luis F. & Sahay, Ratna, 2004. "Commodity currencies and the real exchange rate," Journal of Development Economics, Elsevier, vol. 75(1), pages 239-268, October.
  10. 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.).
  11. Giancarlo Corsetti & Philippe Martin & Paolo Pesenti, 2008. "Varieties and the Transfer Problem: The Extensive Margin of Current Account Adjustment," NBER Working Papers 13795, National Bureau of Economic Research, Inc.
  12. 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.
  13. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2008. "Cross-Border Returns Differentials," NBER Working Papers 13768, National Bureau of Economic Research, Inc.
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