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Characterizing Movements of the U.S. Current Account Deficit

  • Torsten Schmidt

    ()

  • Torge Middendorf

    ()

It is unclear whether the exceptionally highU.S. current account deficit can be sustained for a prolonged period. In this paper we approach the topic whether a gradual adjustment or a pronounced reduction of the deficit is likely to occur. We therefore characterize the dynamics of the current account deficit movements by a three-regime Markov-Switching model. Our finding is that it is possible to distinguish a regime of a strong increasing deficit, a just slightly increasing deficit and a regime of a deficit reduction. Furthermore we find that movements of the deficit are asymmetric.Whereas expansions of the current account deficit are long lasting, reductions of the deficit are rather short. This implies that a pronounced reduction is not likely to occur. Secondly we try to uncover determinants of regime shifts of the current account. Applying ordered Logit models we conclude that a combination of U.S. inflation, U.S. investment and share prices predicts pronounced changes in the current account deficit quite reliably.

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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung in its series RWI Discussion Papers with number 0024.

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Length: 19 pages
Date of creation: Dec 2004
Date of revision:
Handle: RePEc:rwi:dpaper:0024
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  1. Reuven Glick & Kenneth Rogoff, 1992. "Global versus country-specific productivity shocks and the current account," Working Papers in Applied Economic Theory 92-06, Federal Reserve Bank of San Francisco.
  2. Maurice Obstfeld & Kenneth Rogoff, 2001. "Perspectives on OECD Economic Integration: Implications for US Current Account Adjustment," International Trade 0012004, EconWPA.
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  12. Benoît Mercereau, 2003. "The Role of Stock Markets in Current Account Dynamics; Evidence From the United States," IMF Working Papers 03/108, International Monetary Fund.
  13. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 299-308, July.
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  17. Caroline L. Freund, 2000. "Current account adjustment in industrialized countries," International Finance Discussion Papers 692, Board of Governors of the Federal Reserve System (U.S.).
  18. Martin Feldstein, 1992. "The Budget and Trade Deficits Aren't Really Twins," NBER Working Papers 3966, National Bureau of Economic Research, Inc.
  19. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
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