Fundamentals at Odds? The US Current Account Deficit and the Dollar

31 Pages Posted: 18 Dec 2008

See all articles by Gian Maria Milesi-Ferretti

Gian Maria Milesi-Ferretti

International Monetary Fund (IMF); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: November 2008

Abstract

In mid-2008, the real effective exchange rate of the dollar was close to its minimum level for the past 4 decades. 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, real exchange rate, terms of trade

JEL Classification: F31, F32, F41

Suggested Citation

Milesi-Ferretti, Gian Maria, Fundamentals at Odds? The US Current Account Deficit and the Dollar (November 2008). CEPR Discussion Paper No. DP7046. Available at SSRN: https://ssrn.com/abstract=1311170

Gian Maria Milesi-Ferretti (Contact Author)

International Monetary Fund (IMF) ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

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