The U.S. Current Account and the Dollar
Olivier J. Blanchard
National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics
Bocconi University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
King's College London; Institute for the Study of Labor (IZA)
January 26, 2005
MIT Department of Economics Working Paper No. 05-02
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.
Number of Pages in PDF File: 69
Keywords: current account deficit, dollar, depreciation, appreciation, euro, portfolio choice, yen, renminbi
JEL Classification: E3, F21, F32, F41
Date posted: January 27, 2005