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America's Deficit, the World's Problem: Keynote Speech

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  • Obstfeld, Maurice

    (U CA, Berkeley)

Abstract

The U.S. deficit in the current account, now running at an annual rate of over US$700 billion, has reached levels (as a percentage of GDP) not seen since the first decades of the 19th century. The deficit is soaking up roughly three-quarters of the world's available external surpluses. If the deficit continues at this pace, the U.S. could ultimately converge to an external debt/GDP ratio around one. Several analyses suggest that a rapid adjustment of the deficit toward balance would require a very sharp real depreciation of the U.S. dollar. This paper reviews the limitations of some optimistic arguments that predict instead a "soft landing" for the dollar. I focus in particular on the view that greater financial globalization allows the United States easily to run much bigger deficits for much longer periods. Some simple calculations based on real interest rate differentials suggest that markets could be underestimating the extent of necessary dollar depreciation.

Suggested Citation

  • Obstfeld, Maurice, 2005. "America's Deficit, the World's Problem: Keynote Speech," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 23(S1), pages 25-35, October.
  • Handle: RePEc:ime:imemes:v:23:y:2005:i:s1:p:25-35
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    File URL: http://www.imes.boj.or.jp/research/papers/english/me23-s1-4.pdf
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    Cited by:

    1. Riccardo Fiorentini & Guido Montani, 2012. "The New Global Political Economy," Books, Edward Elgar Publishing, number 14443.
    2. De Grauwe, Paul & Rovira Kaltwasser, Pablo, 2012. "Animal spirits in the foreign exchange market," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1176-1192.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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