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The U.S. Current Account Deficit and the Expected Share of World Output

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Author Info
Charles Engel
John H. Rogers

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Abstract

We investigate the possibility that the large current account deficits of the U.S. are the outcome of optimizing behavior. We develop a simple long-run world equilibrium model in which the current account is determined by the expected discounted present value of its future share of world GDP relative to its current share of world GDP. The model suggests that under some reasonable assumptions about future U.S. GDP growth relative to the rest of the advanced countries -- more modest than the growth over the past 20 years -- the current account deficit is near optimal levels. We then explore the implications for the real exchange rate. Under some plausible assumptions, the model implies little change in the real exchange rate over the adjustment path, though the conclusion is sensitive to assumptions about tastes and technology. Then we turn to empirical evidence. A test of current account sustainability suggests that the U.S. is not keeping on a long-run sustainable path. A direct test of our model finds that the dynamics of the U.S. current account -- the increasing deficits over the past decade -- are difficult to explain under a particular statistical model (Markov-switching) of expectations of future U.S. growth. But, if we use survey data on forecasted GDP growth in the G7, our very simple model appears to explain the evolution of the U.S. current account remarkably well. We conclude that expectations of robust performance of the U.S. economy relative to the rest of the advanced countries is a contender -- though not the only legitimate contender -- for explaining the U.S.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11921.

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Date of creation: Jan 2006
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Handle: RePEc:nbr:nberwo:11921

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F3 - International Economics - - International Finance
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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References listed on IDEAS
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2007. "Productivity and the dollar," Working Paper Series 2007-27, Federal Reserve Bank of San Francisco. [Downloadable!]
  2. Ziesemer, Thomas, 2007. "Estimations of US debt dynamics: Growth cum debt and the savings glut in Kouri’s model," UNU-MERIT Working Paper Series 003, United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology. [Downloadable!]
  3. TOPRAK, Metin, 2008. "Turkiye'nin Cari Acigi: Uluslararasi Karsilastirma
    [International Trends in Current Account Deficit: The Case of Turkey]    ," MPRA Paper 8568, University Library of Munich, Germany, revised 01 Apr 2008. [Downloadable!]
  4. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2006. "Productivity, external balance and exchange rates: evidence on the transmission mechanism among G7 countries," Economics Working Papers ECO2006/39, European University Institute. [Downloadable!]
    Other versions:
  5. Christopher Gust & Sylvain Leduc & Nathan Sheets, 2008. "The adjustment of global external balances: does partial exchange rate pass-through to trade prices matter?," Working Paper Series 2008-16, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  6. Charles Engel & John H. Rogers, 2006. "The U.S. current account deficit and the expected share of world output," Working Paper Series 2006-38, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  7. Andrea Ferrero, 2007. "The long-run determinants of U.S. external imbalances," Staff Reports 295, Federal Reserve Bank of New York. [Downloadable!]
  8. Marques, Luis B, 2007. "Welfare Implications of Exchange Rate Changes," MPRA Paper 5721, University Library of Munich, Germany. [Downloadable!]
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