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Understanding the Dynamics of the US External Position

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Abstract

This paper studies the dynamics of the U.S. external position for the past 35 years, and examines alternative paths for future external adjustment. We develop a new present value expression for the external position that embeds the restrictions of international solvency and can be easily empirically evaluated with time series methods. Our empirical model accounts for almost all the variations in the U.S. external position between 1973 and 2008. We estimate that most of the quarter-by-quarter changes in the U.S. external position over this period are due to news about future returns and trade flows, but over long horizons the changes reflect prior expectations about how the U.S. would meet its international financial obligations. Importantly, we identify the expectations embedded in the current U.S. external position that contain relevant information about the future adjustment paths. These expectations indicate that the half-lives for future adjustment paths towards U.S. external balance are at least 13 years and involve a significant real depreciation of the dollar.

Suggested Citation

  • Martin Evans and Alberto Fuertes, 2010. "Understanding the Dynamics of the US External Position," Working Papers gueconwpa~10-10-05, Georgetown University, Department of Economics.
  • Handle: RePEc:geo:guwopa:gueconwpa~10-10-05
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    References listed on IDEAS

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    More about this item

    Keywords

    Capital Flows; External Imbalances; International Debt; International Solvency;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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