Fundamentals at Odds? The U.S. Current Account Deficit and the Dollar
31 Pages Posted: 18 Dec 2008
Date Written: November 2008
Abstract
The real effective exchange rate of the dollar is close to its minimum level for the past 4 decades (as of September 2008). At the same time, however, the U.S. trade and current account deficits remain large and, absent a significant correction in coming years, would contribute to a further accumulation of U.S. external liabilities. The paper discusses the tension between these two aspects of the dollar assessment, and what factors can help reconcile them. It focuses in particular on the terms of trade, adjustment lags, and measurement issues related to both the real effective exchange rate and the current account balance.
Keywords: Current account deficits, United States, Real effective exchange rates, Terms of trade, Current account balances, Adjustment process
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