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The U.S. Current Account Deficit: Gradual Correction or Abrupt Adjustment?

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  • Sebastian Edwards

Abstract

In this paper I use a large multi-country data set to analyze the determinants of abrupt and large %u201Ccurrent account reversals.%u201D The results from a variance-component probit model indicate that the probability of experiencing a major current account reversal is positively affected by larger current account deficits, lower prices of exports relative to imports, and expansive monetary policies. On the other hand, this probability is lower for more advanced countries, and for countries with flexible exchange rates. An analysis of the marginal effects of current account deficits and of the predicted probability of reversal indicates that both have increased significantly for the U.S. since 1999. However, the level of this probability is still on the low side. I estimate that the predicted probability of a current account reversal in the U.S. has increased from 1.7% in 1999, to 14.9% in 2006.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12154.

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Date of creation: Apr 2006
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Publication status: published as Edwards, Sebastian, 2006. "The U.S. current account deficit: Gradual correction or abrupt adjustment?," Journal of Policy Modeling, Elsevier, vol. 28(6), pages 629-643, September.
Handle: RePEc:nbr:nberwo:12154

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  1. Sebastian Edwards & Jeffrey A. Frankel, 2002. "Preventing Currency Crises in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number edwa02-2, October.
  2. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 534, Board of Governors of the Federal Reserve System (U.S.).
  3. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," Research Department Publications, Inter-American Development Bank, Research Department 4367, Inter-American Development Bank, Research Department.
  4. 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, Board of Governors of the Federal Reserve System (U.S.) 827, Board of Governors of the Federal Reserve System (U.S.).
  5. Maurice Obstfeld & Kenneth Rogoff & Richard Clarida, . "The Unsustainable US Current Account Position Revisited," Working Paper 14901, Harvard University OpenScholar.
  6. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, Elsevier, vol. 55(2), pages 263-294, December.
  7. Frankel, Jeffrey & Cavallo, Eduardo, 2004. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp04-038, Harvard University, John F. Kennedy School of Government.
  8. Corden, W. Max, 1994. "Economic Policy, Exchange Rates, and the International System," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198774099, October.
  9. Blanchard, Olivier & Giavazzi, Francesco & Sa, Filipa, 2005. "The US Current Account and the Dollar," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4888, C.E.P.R. Discussion Papers.
  10. Sebastian Edwards, 2002. "Does the Current Account Matter?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 21-76 National Bureau of Economic Research, Inc.
  11. Milesi-Ferretti, Gian Maria & Razin, Assaf, 1998. "Current Account Reversals and Currency Crises: Empirical Regularities," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1921, C.E.P.R. Discussion Papers.
  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.
  13. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
  14. David Backus & Espen Henriksen & Frederic Lambert & Chris Telmer, 2005. "Current Account Fact and Fiction," 2005 Meeting Papers, Society for Economic Dynamics 115, Society for Economic Dynamics.
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Cited by:
  1. Theofilakou, Nancy & Stournaras, Yannis, 2012. "Current account adjustments in OECD countries revisited: The role of the fiscal stance," Journal of Policy Modeling, Elsevier, Elsevier, vol. 34(5), pages 719-734.
  2. Kim, Bong-Han & Min, Hong-Ghi & Hwang, Young-Soon & McDonald, Judith A., 2009. "Are Asian countries' current accounts sustainable? Deficits, even when associated with high investment, are not costless," Journal of Policy Modeling, Elsevier, Elsevier, vol. 31(2), pages 163-179.

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