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Is the U.S. Current Account Deficit Sustainable? If Not, How Costly Is Adjustment Likely to Be?

Listed author(s):
  • Sebastian Edwards

    (University of California, Los Angeles)

Registered author(s):

    This paper analyzes the relationship between the U.S. dollar and the U.S. current account, dealing with issues of sustainability and the mechanics of current account adjustment. The analysis differs from other work in several respects. First, it emphasizes the dynamics of current account adjustment, going beyond computations of the real depreciation required to achieve sustainability. The analysis shows that, even if foreigners’ net demand for U.S. assets continues to increase significantly, the current account deficit is likely to fall steeply in the not too distant future. Second, the paper uses international evidence to explore the likelihood of an abrupt decline in capital flows into the United States. Third, it analyzes the international evidence on current account reversals, to investigate the potential consequences of a sudden stop of capital inflows. This analysis suggests that adjustment of the U.S. external accounts is likely to result in a significant reduction in growth.

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    File URL: http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2005_1_bpea_papers/2005a_bpea_edwards.pdf
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    Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

    Volume (Year): 36 (2005)
    Issue (Month): 1 ()
    Pages: 211-288

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    Handle: RePEc:bin:bpeajo:v:36:y:2005:i:2005-1:p:211-288
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    1. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
    2. Cavallo, Eduardo A. & Frankel, Jeffrey A., 2008. "Does openness to trade make countries more vulnerable to sudden stops, or less? Using gravity to establish causality," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1430-1452, December.
    3. C. Fred Bergsten & John Williamson (ed.), 2003. "Dollar Overvaluation and the World Economy," Peterson Institute Press: Special Reports, Peterson Institute for International Economics, number sr16, October.
    4. Corden, W. Max, 1994. "Economic Policy, Exchange Rates, and the International System," OUP Catalogue, Oxford University Press, number 9780198774099, April.
    5. Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47, November.
    6. Olivier Blanchard & Francesco Giavazzi & Filipa Sa, 2005. "The U.S. Current Account and the Dollar," NBER Working Papers 11137, National Bureau of Economic Research, Inc.
    7. 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.
    8. Xavier Sala-I-Martin, 1997. "Transfers, Social Safety Nets, and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 44(1), pages 81-102, March.
    9. Agnès Bénassy-Quéré & Pascale Duran-Vigneron & Amina Lahrèche-Revil & Mignon, Valerie, 2004. "Burden Sharing and Exchange-Rate Misalignments within the Group of Twenty," Working Papers 2004-13, CEPII research center.
    10. C. Fred Bergsten & John Williamson (ed.), 2003. "Dollar Overvaluation and the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number sr16, November.
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