The U.S. Current Account Deficit and the Expected Share of World Output

FRB International Finance Discussion Paper No. 856

Federal Reserve Bank of San Francisco Working Paper No. 2006-38

54 Pages Posted: 2 May 2006

See all articles by John H. Rogers

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

Multiple version iconThere are 2 versions of this paper

Date Written: April 2006

Abstract

We investigate the possibility that the large current account deficits of the U.S. are the outcome of optimizing behavior. We develop a simple long-run world equilibrium model in which the current account is determined by the expected discounted present value of its future share of world GDP relative to its current share of world GDP. The model suggests that under some reasonable assumptions about future U.S. GDP growth relative to the rest of the advanced countries - more modest than the growth over the past 20 years - the current account deficit is near optimal levels. We then explore the implications for the real exchange rate. Under some plausible assumptions, the model implies little change in the real exchange rate over the adjustment path, though the conclusion is sensitive to assumptions about tastes and technology. Then we turn to empirical evidence. A test of current account sustainability suggests that the U.S. is not keeping on a long-run sustainable path. A direct test of our model finds that the dynamics of the U.S. current account - the increasing deficits over the past decade - are difficult to explain under a particular statistical model (Markov-switching) of expectations of future U.S. growth. But, if we use survey data on forecasted GDP growth in the G7, our very simple model appears to explain the evolution of the U.S. current account remarkably well. We conclude that expectations of robust performance of the U.S. economy relative to the rest of the advanced countries is a contender - though not the only legitimate contender - for explaining the U.S. current account deficit.

JEL Classification: F32, F41

Suggested Citation

Rogers, John H., The U.S. Current Account Deficit and the Expected Share of World Output (April 2006). FRB International Finance Discussion Paper No. 856; Federal Reserve Bank of San Francisco Working Paper No. 2006-38 . Available at SSRN: https://ssrn.com/abstract=900144 or http://dx.doi.org/10.2139/ssrn.900144

John H. Rogers (Contact Author)

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
58
Abstract Views
718
rank
294,102
PlumX Metrics