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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) Francesco Giavazzi University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) Filipa Sa Massachusetts Institute of Technology (MIT) - Department of Economics; International Finance Division, Bank of England; 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.
Keywords: current account deficit, dollar, depreciation, appreciation, euro, portfolio choice, yen, renminbi JEL Classifications: E3, F21, F32, F41 Working Paper SeriesDate posted: January 27, 2005 ; Last revised: May 26, 2005Suggested CitationContact Information
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