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Using external sustainability to forecast the dollar

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Abstract

The sizable run-up in U.S. external debt over the 1980s has prompted many to ask whether continued current account deficits of the magnitude witnessed can be sustained. In several recent papers, different authors have concluded that a given path of the dollar is unsustainable. The conclusion drawn in these earlier papers does not allow for the substantial uncertainty that surrounds this issue, however. There is uncertainty about the estimated model of the U.S. current account that is used to generate the net demand for foreign assets for a given path of the dollar, about the preferences of foreign investors for U.S. assets, and about the mechanics of exchange rate determination that yields a particular path for the dollar. ; In this paper, we develop a way to explicitly address these sources of uncertainty. We find that for any given assumption about foreign preferences or the willingness of foreigners to supply net capital, there is a range of sustainable exchange rates. Moreover, that range of sustainable exchange rates varies considerably with changes in the assumption about foreign preferences. Using our framework, we can recast the earlier studies in terms of the likelihood that particular levels of the dollar would be consistent with sustainability.

Suggested Citation

  • Ellen E. Meade & Charles P. Thomas, 1991. "Using external sustainability to forecast the dollar," International Finance Discussion Papers 398, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:398
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    References listed on IDEAS

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    Cited by:

    1. Narkevich, Siarhei & Trunin, Pavel, 2013. "Prospects for the Russian Ruble as a Regional Reserve Currency," Published Papers dok2, Russian Presidential Academy of National Economy and Public Administration.
    2. Sergey Narkevich & Pavel Trunin, 2012. "Reserve Currencies: Factors of Evolution and their Role in the World Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 162P.
    3. Pavel Trunin & Sergey Narkevich, 2013. "Prospects for the Russian Ruble to Become Regional Reserve Currency," Working Papers 118, Gaidar Institute for Economic Policy, revised 2015.

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    Forecasting; Dollar; American;
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