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The International Dollar Standard and Sustainability of the U.S. Current Account Deficit


  • Ronald McKinnon


April 2001 For more than 20 years, the United States has run current-account deficits with the rest of the world—and is now the world’s largest international debtor. Because the world is on a dollar standard, the United States is unique in having a virtually unlimited international line of credit which is largely denominated in its own currency, i.e., dollars. In contrast, foreign debtor countries must learn to live with currency mismatches where their banks’ and other corporate international liabilities are dollar denominated but their assets are denominated in the domestic currency. As these mismatches cumulate, any foreign country is ultimately forced to repay its debts in order to avoid a run on its currency. But however precarious and over-leveraged the financing of individual American borrowers—including American banks, which intermediate such borrowing internationally—might be, they are invulnerable to dollar devaluation. In effect, America’s collective current-account deficits are sustainable indefinitely. Working Papers Index

Suggested Citation

  • Ronald McKinnon, 2001. "The International Dollar Standard and Sustainability of the U.S. Current Account Deficit," Working Papers 01013, Stanford University, Department of Economics.
  • Handle: RePEc:wop:stanec:01013

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    References listed on IDEAS

    1. Ronald I. McKinnon, 1996. "The Rules of the Game: International Money and Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133180, July.
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    Cited by:

    1. Chen, Shyh-Wei, 2011. "Are current account deficits really sustainable in the G-7 countries?," Japan and the World Economy, Elsevier, vol. 23(3), pages 190-201.
    2. Yan, Ho-don, 2007. "Does capital mobility finance or cause a current account imbalance?," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(1), pages 1-25, March.
    3. Joshua E. Greene & Magda E. Kandil, 2002. "The Impact of Cyclical Factors on the U. S. Balance of Payments," IMF Working Papers 02/45, International Monetary Fund.
    4. Christopoulos, Dimitris & León-Ledesma, Miguel A., 2010. "Current account sustainability in the US: What did we really know about it?," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 442-459, April.
    5. Fabian Lindner, 2014. "Haben die knappen Weltersparnisse die US-Immobilienblase finanziert?," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 40(1), pages 33-61.
    6. Ronald I. McKinnon, 2004. "Optimum Currency Areas and Key Currencies: Mundell I versus Mundell II," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 689-715, November.
    7. Matsubayashi, Yoichi, 2005. "Are US current account deficits unsustainable?: Testing for the private and government intertemporal budget constraints," Japan and the World Economy, Elsevier, vol. 17(2), pages 223-237, April.
    8. Ho-don Yan & Cheng-lang Yang, 2012. "Are there different linkages of foreign capital inflows and the current account between industrial countries and emerging markets?," Empirical Economics, Springer, vol. 43(1), pages 25-54, August.
    9. Aizenman, Joshua & Marion, Nancy, 2003. "The high demand for international reserves in the Far East: What is going on?," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 370-400, September.
    10. Eiji Ogawa & Takeshi Kudo, 2007. "Possible depreciation of the US dollar for unsustainable current account deficit in the United States," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 8(4), pages 24-30, January.
    11. Ogawa, Eiji & Kudo, Takeshi, 2007. "Asymmetric responses of East Asian currencies to the US dollar depreciation for reducing the US current account deficits," Journal of Asian Economics, Elsevier, vol. 18(1), pages 175-194, February.
    12. Cheng, Wenli & Zhang, Dingsheng, 2012. "A monetary model of China–US trade relations," Economic Modelling, Elsevier, vol. 29(2), pages 233-238.
    13. Heinz-Peter Spahn, 2004. "Stabilität und Staatsschulden: die europäische Wirtschaftspolitik in der strategischen Sackgasse," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 73(3), pages 429-444.
    14. Akbar Komijani & Hossein Tavakolian, 2011. "The Composition of Foreign Reserves of the Central Banks of Selected Countries: Will the Euro Replace the Dollar?," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 1(2), pages 143-156, December.

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