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The Unsustainable US Current Account Position Revisited

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Author Info
Maurice Obstfeld
Kenneth Rogoff

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Abstract

We show that the when one takes into account the global equilibrium ramifications of an unwinding of the US current account deficit, currently estimated at 5.4% of GDP, the potential collapse of the dollar becomes considerably larger--more than 50% larger--than our previous estimates (Obstfeld and Rogoff 2000a). That global capital markets may have deepened (as emphasized by US Federal Reserve Chairman Alan Greenspan) does not affect significantly the extent of dollar decline in the wake of global current account adjustment. Rather, the dollar adjustment to global current account rebalancing depends more centrally on the level of goods-market integration. Whereas the dollar's decline may be benign as in the 1980s, we argue that the current conjuncture more closely parallels the early 1970s, when the Bretton Woods system collapsed. Finally, we use our model to dispel some common misconceptions about what kinds of shifts are needed to help close the US current account imbalance. Faster growth abroad helps only if it is relatively concentrated in nontradable goods; faster productivity growth in foreign tradable goods is more likely to exacerbate the US adjustment problem.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10869.

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Date of creation: Nov 2004
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Handle: RePEc:nbr:nberwo:10869

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  2. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The revived Bretton Woods system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 307-313. [Downloadable!]
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  6. Robert J. Gordon, 2004. "Two Centuries of Economic Growth: Europe Chasing the American Frontier," NBER Working Papers 10662, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2003. "Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons," NBER Working Papers 9828, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Tille, Cédric, 2008. "Financial integration and the wealth effect of exchange rate fluctuations," Journal of International Economics, Elsevier, vol. 75(2), pages 283-294, July. [Downloadable!] (restricted)
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  9. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2004. "Financial Globalization and Exchange Rates," CEPR Discussion Papers 4745, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Charles Engel, 1999. "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 507-538, June. [Downloadable!] (restricted)
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  12. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?," NBER Working Papers 11541, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2005-1), pages 67-146. [Downloadable!]
  14. Warnock, Francis E., 2003. "Exchange rate dynamics and the welfare effects of monetary policy in a two-country model with home-product bias," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 343-363, June. [Downloadable!] (restricted)
  15. Cedric Tille, 2003. "The impact of exchange rate movements on U.S. foreign debt," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Jan. [Downloadable!]
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  17. Joseph E. Gagnon, 2003. "Productive capacity, product varieties, and the elasticities approach to the trade balance," International Finance Discussion Papers 781, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  18. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2003. "International Financial Integration," CEPR Discussion Papers 3769, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  20. Hilary Croke & Steven B. Kamin & Sylvain Leduc, 2005. "Financial market developments and economic activity during current account adjustments in industrial economies," International Finance Discussion Papers 827, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  21. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries," NBER Working Papers 10332, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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