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Perspectives on OECD Economic Integration: Implications for US Current Account Adjustment

  • Maurice Obstfeld

    (University of California, Berkeley)

  • Kenneth Rogoff

    (Harvard University)

The US current account deficit has been persistently large and has brought the country's ratio of foreign debt to GDP to 20%, a figure that is high by historical standards. This paper argues that while US solvency is not a near-term constraint on ongoing deficits, the sheer size of the US economy makes it likely that its current account will have to approach balance in the next five to ten years, if not sooner. The paper surveys a wide body of evidence suggesting that the US economy remains surprisingly closed to external trade in products and capital, and suggests that costs of international trade in goods can explain the evidence. Given the trade costs, a substantial real depreciation of the dollar will be needed to close the US current account gap. If current- account adjustment is gradual, then the medium-term depreciation of the dollar would be on the order of 12%. If the current account deficit is eliminated in a precipitous and disorderly fashion, and the Fed attempts to maintain full employment, the depreciation could be much bigger, even on the order of 40% to 50%.

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Paper provided by EconWPA in its series International Trade with number 0012004.

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Length: 63 pages
Date of creation: 09 Feb 2001
Date of revision:
Handle: RePEc:wpa:wuwpit:0012004
Note: 63 pages, Acrobat .pdf
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
  2. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  3. J Anderson & J.P. Neary, 1998. "The Mercantilist Index of Trade Policy," CEP Discussion Papers dp0413, Centre for Economic Performance, LSE.
  4. Charles Engel, 1995. "Accounting for U.S. Real Exchange Rate Changes," NBER Working Papers 5394, National Bureau of Economic Research, Inc.
  5. Obstfeld, Maurice & Rogoff, Kenneth, 1999. "New Directions for Stochastic Open Economy Models," Center for International and Development Economics Research, Working Paper Series qt5pf7g8sh, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  6. Jonathan D. Ostry & Carmen M. Reinhart, 1992. "Private Saving and Terms of Trade Shocks: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 495-517, September.
  7. Alan C. Stockman & Linda L. Tesar, 1990. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," NBER Working Papers 3566, National Bureau of Economic Research, Inc.
  8. Engel, C. & Rogers, J.H., 1995. "How Wide is the Border?," Papers 4-95-16, Pennsylvania State - Department of Economics.
  9. Michael Dooley & Jeffrey Frankel & Donald J. Mathieson, 1987. "International Capital Mobility: What Do Saving-Investment Correlations Tell Us?," IMF Staff Papers, Palgrave Macmillan, vol. 34(3), pages 503-530, September.
  10. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  11. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  12. Catherine L. Mann, 1999. "Is the U.S. Trade Deficit Sustainable?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 47, December.
  13. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  14. Charles Freedman, 1979. "A Note on Net Interest Payments to Foreigners under Inflationary Conditions," Canadian Journal of Economics, Canadian Economics Association, vol. 12(2), pages 291-99, May.
  15. Bulow, Jeremy & Rogoff, Kenneth, 1990. "Cleaning Up Third World Debt without Getting Taken to the Cleaners," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 31-42, Winter.
  16. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
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