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The end of large current account deficits : 1970-2002 : are there lessons for the United States?

  • Sebastian Edwards

The future of the U.S. current account -- and thus of the U.S. dollar -- depend on whether foreign investors will continue to add U.S. assets to their investment portfolios. However, even under optimistic scenarios, the U.S. current account deficit is likely to go through a significant reversal at some point in time. This adjustment may be as large of 4% to 5% of GDP. In order to have an idea of the possible consequences of this type of adjustment, I have analyzed the international evidence on current account reversals using both non-parametric techniques as well as panel regressions. The results from this empirical investigation indicate that major current account reversals have tended to result in large declines in GDP growth. I also analyze the large U.S. current account adjustment of 1987-1991.

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Article provided by Federal Reserve Bank of Kansas City in its journal Proceedings - Economic Policy Symposium - Jackson Hole.

Volume (Year): (2005)
Issue (Month): Aug ()
Pages: 205-268

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Handle: RePEc:fip:fedkpr:y:2005:i:aug:p:205-268
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