The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account

50 Pages Posted: 17 Aug 2005

See all articles by Aart Kraay

Aart Kraay

World Bank - Development Research Group (DECRG)

Jaume Ventura

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2005

Abstract

Over the past decade the U.S. has experienced widening current account deficits and a steady deterioration of its net foreign asset position. During the second half of the 1990s, this deterioration was fuelled by foreign investment in a booming U.S. stock market. During the first half of the 2000s, this deterioration has been fuelled by foreign purchases of rapidly increasing U.S. government debt. A somewhat surprising aspect of the current debate is that stock market movements and fiscal policy choices have been largely treated as unrelated events. Stock market movements are usually interpreted as reflecting exogenous changes in perceived or real productivity, while budget deficits are usually understood as a mainly political decision. We challenge this view here and develop two alternative interpretations. Both are based on the notion that a bubble (the 'dot-com' bubble) has been driving the stock market, but differ in their assumptions about the interactions between this bubble and fiscal policy (the 'Bush' deficits). The 'benevolent' view holds that a change in investor sentiment led to the collapse of the dot-com bubble and the Bush deficits were a welfare-improving policy response to this event. The 'cynical' view holds instead that the Bush deficits led to the collapse of the dot-com bubble as the new administration tried to appropriate rents from foreign investors. We discuss the implications of each of these views for the future evolution of the U.S. economy and, in particular, its net foreign asset position.

Keywords: Current account, net foreign assets, stock market bubbles, budget deficits

JEL Classification: F21, F32, F36

Suggested Citation

Kraay, Aart and Ventura, Jaume, The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account (July 2005). CEPR Discussion Paper No. 5157. Available at SSRN: https://ssrn.com/abstract=785304

Aart Kraay

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-473-5756 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/akraay

Jaume Ventura (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
18
Abstract Views
928
PlumX Metrics