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Characterizing Movements of the U.S. Current Account Deficit

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Author Info
Torsten Schmidt ()
Torge Middendorf ()

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Abstract

It is unclear whether the exceptionally highU.S. current account deficit can be sustained for a prolonged period. In this paper we approach the topic whether a gradual adjustment or a pronounced reduction of the deficit is likely to occur. We therefore characterize the dynamics of the current account deficit movements by a three-regime Markov-Switching model. Our finding is that it is possible to distinguish a regime of a strong increasing deficit, a just slightly increasing deficit and a regime of a deficit reduction. Furthermore we find that movements of the deficit are asymmetric.Whereas expansions of the current account deficit are long lasting, reductions of the deficit are rather short. This implies that a pronounced reduction is not likely to occur. Secondly we try to uncover determinants of regime shifts of the current account. Applying ordered Logit models we conclude that a combination of U.S. inflation, U.S. investment and share prices predicts pronounced changes in the current account deficit quite reliably.

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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung in its series RWI Discussion Papers with number 0024.

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Length: 19 pages
Date of creation: Dec 2004
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Handle: RePEc:rwi:dpaper:0024

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Related research
Keywords: Markov-Switching Model; Ordered Logit; Indicators;

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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  2. Joshua E. Greene & Magda E. Kandil, 2002. "The Impact of Cyclical Factors on the U.S. Balance of Payments," IMF Working Papers 02/45, International Monetary Fund. [Downloadable!]
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  17. William Poole, 2004. "A perspective on U.S. international capital flows," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 1-8. [Downloadable!]
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  18. Glick, Reuven & Rogoff, Kenneth, 1995. "Global versus country-specific productivity shocks and the current account," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 159-192, February. [Downloadable!] (restricted)
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