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The U.S. Current Account and the Dollar

  • Olivier Blanchard
  • Francesco Giavazzi
  • Filipa Sa

There are two main forces behind the large U.S. current account deficits. First, an increase in the U.S. demand for foreign goods. Second, an increase in the foreign demand for U.S. assets. Both forces have contributed to steadily increasing current account deficits since the mid--1990s. This increase has been accompanied by a real dollar appreciation until late 2001, and a real depreciation since. The depreciation has accelerated recently, raising the questions of whether and how much more is to come, and if so, against which currencies, the euro, the yen, or the renminbi. Our purpose in this paper is to explore these issues. Our theoretical contribution is to develop a simple portfolio model of exchange rate and current account determination, and to use it to interpret the past and explore alternative scenarios for the future. Our practical conclusions are that substantially more depreciation is to come, surely against the yen and the renminbi, and probably against the euro.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11137.

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Date of creation: Feb 2005
Date of revision:
Publication status: published as Blanchard, Oliver, Francesco Giavazzi,and Filipa Sa. "International Investors, the U.S. Current Account, and the Dollar." Brookings Papers on Economic Activity 1 (2005): 1-49.
Handle: RePEc:nbr:nberwo:11137
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  1. Philip R. Lane & Gian Maria Milesi-Ferretti, 2005. "Financial Globalisation and Exchange Rates," The Institute for International Integration Studies Discussion Paper Series iiisdp044, IIIS.
  2. Maurice Obstfeld & Kenneth Rogoff, 2004. "The Unsustainable US Current Account Position Revisited," NBER Working Papers 10869, National Bureau of Economic Research, Inc.
  3. Ricardo J. Caballero & Emmanuel Farhi & Mohamad L. Hammour, 2006. "Speculative Growth: Hints from the U.S. Economy," American Economic Review, American Economic Association, vol. 96(4), pages 1159-1192, September.
  4. Houthakker, Hendrik S & Magee, Stephen P, 1969. "Income and Price Elasticities in World Trade," The Review of Economics and Statistics, MIT Press, vol. 51(2), pages 111-25, May.
  5. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "International Financial Adjustment," Center for International and Development Economics Research, Working Paper Series qt124628cx, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  6. Henderson, Dale W. & Rogoff, Kenneth, 1982. "Negative net foreign asset positions and stability in a world portfolio balance model," Journal of International Economics, Elsevier, vol. 13(1-2), pages 85-104, August.
  7. Menzie D. Chinn, 2003. "Doomed to Deficits? Aggregate U.S. Trade Flows Re-Examined," NBER Working Papers 9521, National Bureau of Economic Research, Inc.
  8. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  9. Ricardo J. Caballero & Mohamad L. Hammour, 2002. "Speculative Growth," NBER Working Papers 9381, National Bureau of Economic Research, Inc.
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