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

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  • Sebastian Edwards

    (University of California, Los Angeles)

Abstract

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.

Suggested Citation

  • Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? If Not, How Costly Is Adjustment Likely to Be?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 211-288.
  • Handle: RePEc:bin:bpeajo:v:36:y:2005:i:2005-1:p:211-288
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    File URL: https://www.brookings.edu/wp-content/uploads/2005/01/2005a_bpea_edwards.pdf
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    References listed on IDEAS

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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. Guillermo A. Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2004. "On the empirics of Sudden Stops: the relevance of balance-sheet effects," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    4. 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.
    5. Corden, W. Max, 1994. "Economic Policy, Exchange Rates, and the International System," OUP Catalogue, Oxford University Press, number 9780198774099.
    6. Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47.
    7. 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.
    8. 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.
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    Citations

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    Cited by:

    1. Chen Fang & Cheng-te Lee, 2014. "Coexistence of Sustained External Imbalance and Real Exchange Rate Misalignment: The Underlying Fundamentals," Economics Bulletin, AccessEcon, vol. 34(3), pages 1714-1722.
    2. Theofilakou, Nancy & Stournaras, Yannis, 2012. "Current account adjustments in OECD countries revisited: The role of the fiscal stance," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 719-734.
    3. Blaise Gnimassoun & Marc Joets & Tovonony Razafindrabe, 2016. "On the link between current account and oil price fluctuation in diversified economies: The case of Canada," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 2016-08, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    4. repec:eee:inteco:v:152:y:2017:i:c:p:63-78 is not listed on IDEAS
    5. Alexander D Klemm, 2013. "Growth Following Investment and Consumption-Driven Current Account Crises," IMF Working Papers 13/217, International Monetary Fund.
    6. Arslan, Yavuz & Kılınç, Mustafa & Turhan, M. İbrahim, 2015. "Global imbalances, current account rebalancing and exchange rate adjustments," Journal of Policy Modeling, Elsevier, vol. 37(2), pages 324-341.
    7. Steven B. Kamin & Trevor A. Reeve & Nathan Sheets, 2009. "U.S. External Adjustment: Is It Disorderly? Is It Unique? Will It Disrupt The Rest Of The World?," Contemporary Economic Policy, Western Economic Association International, vol. 27(2), pages 265-292, April.
    8. Akito Matsumoto & Charles Engel, 2005. "Portfolio Choice in a Monetary Open-Economy DSGE Model," IMF Working Papers 05/165, International Monetary Fund.
    9. Harashima, Taiji, 2015. "Why Has the U.S. Current Account Deficit Persisted? International Sustainable Heterogeneity under Floating Exchange Rates," MPRA Paper 67177, University Library of Munich, Germany.
    10. Rod Tyers & Iain Bain, 2008. "American and European Financial Shocks: Implications for Chinese Economic Performance," ANU Working Papers in Economics and Econometrics 2008-491, Australian National University, College of Business and Economics, School of Economics.
    11. N. Nergiz Dincer & Pinar Yasar, 2015. "Identification of Current Account Deficit: The Case of Turkey," The International Trade Journal, Taylor & Francis Journals, vol. 29(1), pages 63-87, March.
    12. Federici, Daniela & Gandolfo, Giancarlo, 2012. "The Euro/Dollar exchange rate: Chaotic or non-chaotic? A continuous time model with heterogeneous beliefs," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 670-681.
    13. Alpaslan AKÇORAOĞLU & Erkan AĞASLAN, 2009. "Current Account Deficits, Sustainability and Global Financial Crisis: Evidence from Turkey, 1987-2008," Ekonomik Yaklasim, Ekonomik Yaklasim Association, vol. 20(72), pages 1-20.
    14. Gnimassoun, Blaise & Coulibaly, Issiaka, 2014. "Current account sustainability in Sub-Saharan Africa: Does the exchange rate regime matter?," Economic Modelling, Elsevier, vol. 40(C), pages 208-226.
    15. Joseph Gruber & Steven Kamin, 2009. "Do Differences in Financial Development Explain the Global Pattern of Current Account Imbalances?," Review of International Economics, Wiley Blackwell, vol. 17(4), pages 667-688, September.
    16. repec:kap:openec:v:28:y:2017:i:4:d:10.1007_s11079-016-9429-5 is not listed on IDEAS
    17. Elettra PALAZZESI & Andrea COVELLI & Giovanni CASCIELLO, 2014. "On The Volatility As A Determinant Of The Financial Crisis," Curentul Juridic, The Juridical Current, Le Courant Juridique, Petru Maior University, Faculty of Economics Law and Administrative Sciences and Pro Iure Foundation, vol. 57, pages 101-109, June.
    18. Corsetti, Giancarlo & Martin, Philippe & Pesenti, Paolo, 2013. "Varieties and the transfer problem," Journal of International Economics, Elsevier, vol. 89(1), pages 1-12.

    More about this item

    Keywords

    macroeconomics; U.S. Current Account Deficit; Sustainable; Adjustment;

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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