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The U.S. Current Account and the Dollar


Olivier J. Blanchard


Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); International Monetary Fund (IMF)

Francesco Giavazzi


Bocconi University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Filipa Sa


King's College London; Institute for the Study of Labor (IZA)

January 26, 2005

MIT Department of Economics Working Paper No. 05-02

Abstract:     
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 accelerated in late 2004, 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 model of exchange rate and current account determination based on imperfect substitutability in both goods and asset markets, 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.

Number of Pages in PDF File: 69

Keywords: current account deficit, dollar, depreciation, appreciation, euro, portfolio choice, yen, renminbi

JEL Classification: E3, F21, F32, F41

working papers series


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Date posted: January 27, 2005  

Suggested Citation

Blanchard, Olivier J. and Giavazzi, Francesco and Sa, Filipa, The U.S. Current Account and the Dollar (January 26, 2005). MIT Department of Economics Working Paper No. 05-02. Available at SSRN: http://ssrn.com/abstract=655402 or http://dx.doi.org/10.2139/ssrn.655402

Contact Information

Olivier J. Blanchard (Contact Author)
Massachusetts Institute of Technology (MIT) - Department of Economics ( email )
Room E52-357
50 Memorial Drive
Cambridge, MA 02142
United States
617-253-8891 (Phone)
617-253-4096 (Fax)
HOME PAGE: http://mit.edu/blanchar/www/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
International Monetary Fund (IMF) ( email )
700 19th Street, N.W.
Washington, DC 20431
United States
202 623 7825 (Phone)
202 623 7271 (Fax)
Francesco Giavazzi
Bocconi University - Department of Economics ( email )
Via Gobbi 5
Milan, 20136
Italy
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Filipa G. Sa
King's College London ( email )
150 Stamford Street
London, SE1 9NN
United Kingdom
Institute for the Study of Labor (IZA)
Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany
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