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Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?

  • Sebastian Edwards

In this paper I analyze the relationship between the U.S. dollar and the U.S. current account. I deal with issues of sustainability, and I discuss the mechanics of current account adjustment. The analysis presented in this paper differs from other work in several respects: First, I emphasis the dynamics of the current account adjustment, going beyond computations of the "required" real depreciation of the dollar to achieve sustainability. I show that even if foreigners' (net) demand for U.S. assets continues to increase significantly, the current account deficit is likely to experience a large decline in the (not too distant) future. Second, I rely on international evidence to explore the likelihood of an abrupt decline in capital flows into the U.S. And third, I analyze the international evidence on current account reversals, to investigate the potential consequences of a (possible) sudden stop of capital flows into the U.S. This analysis suggests that the future adjustment of the U.S. external accounts is likely to result in a significant reduction in growth.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11541.

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Date of creation: Aug 2005
Date of revision:
Publication status: published as Edwards, Sebvastian. "Is The U.S. Current Account Deficit Sustainable? If Not, How Costly Is Adjustment Likely To Be?," Brookings Papers on Economic Activity, 2005, v2005(1), 211-288.
Handle: RePEc:nbr:nberwo:11541
Note: IFM
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  9. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
  10. Alan M. Taylor, 2002. "A Century of Current Account Dynamics," NBER Working Papers 8927, National Bureau of Economic Research, Inc.
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  24. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries," NBER Working Papers 10332, National Bureau of Economic Research, Inc.
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