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Reprint of: The dollar and the current account deficit: How much should we worry?

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  • Mussa, Michael

Abstract

The U.S. current account deficit is unsustainable and will need to fall by half as a share of GDP in coming years. The adjustment process will necessarily involve (1) substantial further real effective depreciation of the U.S. dollar, (2) slowing of U.S. demand growth below potential output growth, and (3) acceleration of demand growth relative to output growth in the rest of the world. Adjustment is likely to be reasonably orderly, with only modest risks of a “dollar crash”. Policy, including more aggressive fiscal consolidation in the U.S. and more rapid appreciation of key Asian currencies, can help assure orderly adjustment.

Suggested Citation

  • Mussa, Michael, 2012. "Reprint of: The dollar and the current account deficit: How much should we worry?," Journal of Policy Modeling, Elsevier, vol. 34(4), pages 579-584.
  • Handle: RePEc:eee:jpolmo:v:34:y:2012:i:4:p:579-584
    DOI: 10.1016/j.jpolmod.2012.05.014
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    Cited by:

    1. Wong Hock Tsen, 2014. "External Balance And Budget In Malaysia," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 10(2), pages 37-54.

    More about this item

    Keywords

    Unsustainable current account deficit; Real effective exchange rate depreciation; Demand growth relative to output growth; Dollar crash;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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