Abstract

http://ssrn.com/abstract=893570
 
 

References (28)



 
 

Citations (125)



 


 



The Unsustainable U.S. Current Account Position Revisited


Maurice Obstfeld


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

Kenneth Rogoff


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

December 2005

CEPR Discussion Paper No. 5416

Abstract:     
We show that the when one takes into account the global equilibrium ramifications of an unwinding of the US current account deficit, currently running at more than 6% of GDP, the potential collapse of the dollar becomes considerably larger than our previous estimates (Obstfeld and Rogoff 2000a) - as much as 30% or even higher. It is true that global capital market deepening appears to have accelerated over the past decade (a fact documented by Lane and Milesi-Ferreti (2003, 2004) and recently emphasized by outgoing US Federal Reserve Chairman Alan Greenspan), and that this deepening may have helped allowed the United States to a record-breaking string of deficits. Unfortunately, however, global capital market deepening turns out to be of only modest help in mitigating the dollar decline that will almost inevitably occur in the wake of global current account adjustment. As the analysis of our earlier papers (2000a,b) showed, and the model of this paper reinforces, adjustments to large current account shifts depend mainly on the flexibility and global integration of goods and factor markets. Whereas the dollar's decline may be benign as in the 1980s, we argue that the current conjuncture more closely parallels the early 1970s, when the Bretton Woods system collapsed. Finally, we use our model to dispel some common misconceptions about what kinds of shifts are needed to help close the US current account imbalance. For example, faster growth abroad helps only if it is relatively concentrated in nontradable goods; faster productivity growth in foreign tradable goods will actually exacerbate the US adjustment problem.

Number of Pages in PDF File: 54

Keywords: External imbalance, net foreign assets, real exchange rate, sustainability, US current account deficit

JEL Classification: F21, F32, F36, F41

working papers series


Date posted: March 27, 2006  

Suggested Citation

Obstfeld, Maurice and Rogoff, Kenneth, The Unsustainable U.S. Current Account Position Revisited (December 2005). CEPR Discussion Paper No. 5416. Available at SSRN: http://ssrn.com/abstract=893570

Contact Information

Maurice Obstfeld (Contact Author)
University of California, Berkeley - Department of Economics ( email )
549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-643-9646 (Phone)
510-642-6615 (Fax)
HOME PAGE: http://emlab.berkeley.edu/users/obstfeld/
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Kenneth S. Rogoff
Harvard University - Department of Economics ( email )
Littauer Center
Room 232
Cambridge, MA 02138
United States
617-495-4022 (Phone)
617-495-7730 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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References:  28
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