The U.S. Current Account and the Dollar

44 Pages Posted: 26 May 2005

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

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

Francesco Giavazzi

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER); 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: February 2005

Abstract

There are two main forces behind the large US current account deficits. First, an increase in the US demand for foreign goods. Second, an increase in the foreign demand for US 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 has accelerated recently, 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 portfolio model of exchange rate and current account determination, 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: Dollar exchange rate, current account, portfolio models

JEL Classification: E30, F21, F32, F41

Suggested Citation

Blanchard, Olivier J. and Giavazzi, Francesco and Sa, Filipa G., The U.S. Current Account and the Dollar (February 2005). CEPR Discussion Paper No. 4888. Available at SSRN: https://ssrn.com/abstract=729903

Olivier J. Blanchard

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 (Contact Author)

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 02 5836 3304 (Phone)
+39 02 5836 3302 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
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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