Can International Productivity Differences Explain U.S. Current Account Deficits?

34 Pages Posted: 19 Mar 2008

See all articles by Suparna Chakraborty

Suparna Chakraborty

University of San Francisco

Robert Dekle

University of Southern California - Department of Economics

Date Written: January 9, 2008

Abstract

An influential explanation for the recent rise in the U.S. current account deficit is the boom in U.S. productivity. As U.S. productivity surged in the mid-1990s, capital was attracted to the U.S. to take advantage of the higher real returns. Using a two country general equilibrium model, this paper quantitatively shows that the gap in productivity growth between the U.S. and the "rest of the world" cannot explain the U.S. current account deficits, especially in the 1980s and the 2000s. This is because on a GDP-weighted basis, the "rest of the world" actually had higher productivity growth during these periods, and standard macroeconomic models would predict an outflow of funds from the U.S. to the rest of the world, and a consequent U.S. current account surplus. We show that changes in global financial integration can help explain this anomaly in U.S. current account behavior.

Keywords: Current account deficit, productivity, Financial integration, General Equilibrium

JEL Classification: F32, F34, F36

Suggested Citation

Chakraborty, Suparna and Dekle, Robert, Can International Productivity Differences Explain U.S. Current Account Deficits? (January 9, 2008). IEPR Working Paper No. 08.04. Available at SSRN: https://ssrn.com/abstract=1108942 or http://dx.doi.org/10.2139/ssrn.1108942

Suparna Chakraborty (Contact Author)

University of San Francisco ( email )

2130 Fulton Street
San Francisco, CA 94117-1080
United States

HOME PAGE: http://chakrabortys.weebly.com

Robert Dekle

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
213-740-8335 (Phone)

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