The Sustainability of the U.S. Current Account Deficit: Revisiting Mann's Rule
Using quarterly data from 1973 to 2008, we provide evidence that current account (CA) deficits exceeding 4.2% of GDP (Mann's rule") do have a significant lowering effect on the U.S. dollar value against major currencies. Controlling for inflation, public debt, and a broad trade weighted index, excessive CA deficits have a negative long-run impact on the USD. Along the transition path, much faster speeds of adjustment to long-run equilibrium are found when current account deficits in excess of Mann's rule are considered: 20% of the deviations from the long-run equilibrium are corrected in a month against 8% or 9% without Mann's rule. This suggests that excessive values of the CA deficit are priced in" in international foreign exchange markets. Contrary to earlier evidence in favor of CA sustainability, we conjecture that economic conditions have made investors more sensitive to bad news for the U.S. dollar.
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Volume (Year): 9 (2010)
Issue (Month): 4 (January)
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