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The U.S. Current Account and the Dollar

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  • Olivier Blanchard
  • Francesco Giavazzi
  • Filipa Sa

Abstract

There are two main forces behind the large U.S. current account deficits. First, an increase in the U.S. demand for foreign goods. Second, an increase in the foreign demand for U.S. assets. Both forces have contributed to steadily increasing current account deficits since the mid--1990s. This increase has been accompanied by a real dollar appreciation until late 2001, and a real depreciation since. The depreciation has accelerated recently, raising the questions of whether and how much more is to come, and if so, against which currencies, the euro, the yen, or the renminbi. Our purpose in this paper is to explore these issues. Our theoretical contribution is to develop a simple portfolio model of exchange rate and current account determination, and to use it to interpret the past and explore alternative scenarios for the future. Our practical conclusions are that substantially more depreciation is to come, surely against the yen and the renminbi, and probably against the euro.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11137.

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Date of creation: Feb 2005
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Publication status: published as Blanchard, Oliver, Francesco Giavazzi,and Filipa Sa. "International Investors, the U.S. Current Account, and the Dollar." Brookings Papers on Economic Activity 1 (2005): 1-49.
Handle: RePEc:nbr:nberwo:11137

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  1. Maurice Obstfeld & Kenneth Rogoff, 2005. "The unsustainable U.S. current account position revisited," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  2. Ricardo Caballero & Emmanuel Farhi & Mohamad L. Hammour, 2004. "Speculative Growth: Hints from the US Economy," NBER Working Papers 10518, National Bureau of Economic Research, Inc.
  3. Menzie D. Chinn, 2003. "Doomed to Deficits? Aggregate U.S. Trade Flows Re-Examined," NBER Working Papers 9521, National Bureau of Economic Research, Inc.
  4. Pierre-Olivier Gourinchas & Hélène Rey, 2005. "International financial adjustment," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  5. Gian-Maria Milesi-Ferretti & Philip R. Lane, 2005. "Financial Globalization and Exchange Rates," IMF Working Papers 05/3, International Monetary Fund.
  6. Ricardo J. Caballero & Mohamad L. Hammour, 2002. "Speculative Growth," NBER Working Papers 9381, National Bureau of Economic Research, Inc.
  7. Henderson, Dale W. & Rogoff, Kenneth, 1982. "Negative net foreign asset positions and stability in a world portfolio balance model," Journal of International Economics, Elsevier, vol. 13(1-2), pages 85-104, August.
  8. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  9. Houthakker, Hendrik S & Magee, Stephen P, 1969. "Income and Price Elasticities in World Trade," The Review of Economics and Statistics, MIT Press, vol. 51(2), pages 111-25, May.
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