The Expectations-Driven Us Current Account
36 Pages Posted: 21 Jun 2016
Date Written: 2013
Since 1991, survey expectations of long-run output growth for the U.S. relative to the rest of the world exhibit a pattern strikingly similar to that of the U.S. current account, and thus also to global imbalances. We show that this finding can to a large extent be rationalized in a two-region stochastic growth model simulated using expected trend growth filtered from observed productivity. In line with the intertemporal approach to the current account, a major part of the buildup of the U.S. current account deficit appears to be driven by the optimal response of households and firms to improved growth prospects.
Keywords: open economy, stochastic trend growth, Kalman filter, news shocks
JEL Classification: F32, E13, E32, D83, O40
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