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The unsustainable U.S. current account position revisited

  • Maurice Obstfeld
  • Kenneth S. Rogoff

Keywords: US current account deficit, external imbalance, net foreign assets, real exchange rate, sustainability JEL Codes: F21, F32, F36, F41 ABSTRACT:We show that the when one takes into account the global equilibrium ramifications of an unwinding of the US current account deficit, currently running at more than 6% of GDP, the potential collapse of the dollar becomes considerably larger than our previous estimates (Obstfeld and Rogoff 2000a)—as much as 30% or even higher. It is true that global capital market deepening appears to have accelerated over the past decade (a fact documented by Lane and Milesi-Ferreti (2003, 2004) and recently emphasized by outgoing US Federal Reserve Chairman Alan Greenspan), and that this deepening may have helped allowed the United States to a recordbreaking string of deficits. Unfortunately, however, global capital market deepening turns out to be of only modest help in mitigating the dollar decline that will almost inevitably occur in the wake of global current account adjustment. As the analysis of our earlier papers (2000a,b) showed, and the model of this paper reinforces, adjustments to large current account shifts depend mainly on the flexibility and global integration of goods and factor markets. Whereas the dollar’s decline may be benign as in the 1980s, we argue that the current conjuncture more closely parallels the early 1970s, when the Bretton Woods system collapsed. Finally, we use our model to dispel some common misconceptions about what kinds of shifts are needed to help close the US current account imbalance. For example, faster growth abroad helps only if it is relatively concentrated in nontradable goods; faster productivity growth in foreign tradable goods will actually exacerbate the US adjustment problem.

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Volume (Year): (2005)
Issue (Month): Feb ()
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Handle: RePEc:fip:fedfpr:y:2005:i:feb:x:6
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  1. Pierre-Olivier Gourinchas & Hélène Rey, 2005. "International Financial Adjustment," International Finance 0505004, EconWPA.
  2. Sebastian Edwards, 2005. "Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?," NBER Working Papers 11541, National Bureau of Economic Research, Inc.
  3. Francis E. Warnock, 2000. "Exchange rate dynamics and the welfare effects of monetary policy in a two-country model with home-product bias," International Finance Discussion Papers 667, Board of Governors of the Federal Reserve System (U.S.).
  4. Campa, Jose M. & Goldberg, Linda S., 2002. "Exchange rate pass-through into import prices: A macro or micro phenomenon?," IESE Research Papers D/475, IESE Business School.
  5. Philip R. Lane & G Milesi-Feretti, 2004. "Financial Globalization and Exchange Rates," CEP Discussion Papers dp0662, Centre for Economic Performance, LSE.
  6. Alejandro Izquierdo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability in Argentina," The World Economy, Wiley Blackwell, vol. 25(7), pages 903-923, 07.
  7. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "Perspectives on OECD Economic Integration: Implications for US Current Account Adjustment," Center for International and Development Economics Research, Working Paper Series qt16z3s2s2, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  8. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
  9. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
  10. Joseph E. Gagnon, 2003. "Productive capacity, product varieties, and the elasticities approach to the trade balance," International Finance Discussion Papers 781, Board of Governors of the Federal Reserve System (U.S.).
  11. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," CEG Working Papers 20012, Trinity College Dublin, Department of Economics.
  12. Charles Engel, 1995. "Accounting for U.S. Real Exchange Rate Changes," NBER Working Papers 5394, National Bureau of Economic Research, Inc.
  13. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
  14. Castiglionesi, F. & Navarro, N., 2007. "Optimal Fragile Financial Networks," Discussion Paper 2007-100, Tilburg University, Center for Economic Research.
  15. Gian Maria Milesi-Ferretti, & Philip R. Lane, 2003. "International Financial Integration," The Institute for International Integration Studies Discussion Paper Series iiisdp03, IIIS.
  16. Obstfeld,Maurice & Taylor,Alan M., 2005. "Global Capital Markets," Cambridge Books, Cambridge University Press, number 9780521671798, Junio.
  17. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
  18. Robert J. Gordon, 2004. "Two Centuries of Economic Growth: Europe Chasing the American Frontier," NBER Working Papers 10662, National Bureau of Economic Research, Inc.
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  20. Alejandro Izquierdo & Ernesto Talvi & Guillermo A. Calvo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons," Research Department Publications 4299, Inter-American Development Bank, Research Department.
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  22. Cedric Tille, 2003. "The impact of exchange rate movements on U.S. foreign debt," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 9(Jan).
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  26. repec:cto:journl:v:24:y:2004:i:1-2:p:1-11 is not listed on IDEAS
  27. Tille, Cédric, 2008. "Financial integration and the wealth effect of exchange rate fluctuations," Journal of International Economics, Elsevier, vol. 75(2), pages 283-294, July.
  28. Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47, January.
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  30. Alan Greenspan, 2004. "The Evolving U.S. Payments Imbalance and Its Impact on Europe and the Rest of the World," Cato Journal, Cato Journal, Cato Institute, vol. 24(1-2), pages 1-11, Spring/Su.
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