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Fundamentals at Odds? The U.S. Current Account Deficit and The Dollar

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Author Info
Gian Maria Milesi-Ferretti

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

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Length: 29 pages
Date of creation: 20 Nov 2008
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Handle: RePEc:imf:imfwpa:08/260

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Keywords: Current account deficits ; United States ; Real effective exchange rates ; Terms of trade ; Current account balances ; Adjustment process ;

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  1. Robert Dekle & Jonathan Eaton & Samuel Kortum, 2007. "Unbalanced Trade," American Economic Review, American Economic Association, vol. 97(2), pages 351-355, May. [Downloadable!]
    Other versions:
  2. 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. [Downloadable!] (restricted)
  3. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2008. "Cross-Border Returns Differentials," NBER Working Papers 13768, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
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  6. 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.). [Downloadable!]
  7. Chen, Yu-chin & Rogoff, Kenneth, 2003. "Commodity currencies," Journal of International Economics, Elsevier, vol. 60(1), pages 133-160, May. [Downloadable!] (restricted)
  8. Hilary Croke & Steven B. Kamin & Sylvain Leduc, 2006. "An Assessment of the Disorderly Adjustment Hypothesis for Industrial Economies," International Finance, Blackwell Publishing, vol. 9(1), pages 37-61, 05. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
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  10. 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.). [Downloadable!]
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