Can International Productivity Differences Alone Account for the US Current Account Deficits?
27 Pages Posted: 15 Oct 2009
An influential explanation for the recent rise in the US current account deficit is the boom in US productivity. As US productivity surged in the mid-1990s, capital was attracted to the US 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 US and the “rest of the world” cannot explain the US 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 US to the rest of the world, and a consequent US current account surplus. We show that changes in global financial integration can help explain this anomaly in US current account behavior.
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