The U.S. Current Account and the Dollar

69 Pages Posted: 27 Jan 2005  

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Francesco Giavazzi

Bocconi University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Filipa Sa

King's College London; IZA Institute of Labor Economics

Multiple version iconThere are 3 versions of this paper

Date Written: January 26, 2005

Abstract

There are two main forces behind the large U.S. current account deficits. First, an increase in the U.S. demand for foreign goods. Second, an increase in the foreign demand for U.S. assets.

Both forces have contributed to steadily increasing current account deficits since the mid-1990s. This increase has been accompanied by a real dollar appreciation until late 2001, and a real depreciation since. The depreciation accelerated in late 2004, raising the questions of whether and how much more is to come, and if so, against which currencies, the euro, the yen, or the renminbi.

Our purpose in this paper is to explore these issues. Our theoretical contribution is to develop a simple model of exchange rate and current account determination based on imperfect substitutability in both goods and asset markets, and to use it to interpret the past and explore alternative scenarios for the future. Our practical conclusions are that substantially more depreciation is to come, surely against the yen and the renminbi, and probably against the euro.

Keywords: current account deficit, dollar, depreciation, appreciation, euro, portfolio choice, yen, renminbi

JEL Classification: E3, F21, F32, F41

Suggested Citation

Blanchard, Olivier J. and Giavazzi, Francesco and Sa, Filipa, The U.S. Current Account and the Dollar (January 26, 2005). MIT Department of Economics Working Paper No. 05-02. Available at SSRN: https://ssrn.com/abstract=655402 or http://dx.doi.org/10.2139/ssrn.655402

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Francesco Giavazzi

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Filipa G. Sa

King's College London ( email )

150 Stamford Street
London, SE1 9NN
United Kingdom

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

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