Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?

Sebastian Edwards ()

No 11541, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper I analyze the relationship between the U.S. dollar and the U.S. current account. I deal with issues of sustainability, and I discuss the mechanics of current account adjustment. The analysis presented in this paper differs from other work in several respects: First, I emphasis the dynamics of the current account adjustment, going beyond computations of the "required" real depreciation of the dollar to achieve sustainability. I show that even if foreigners' (net) demand for U.S. assets continues to increase significantly, the current account deficit is likely to experience a large decline in the (not too distant) future. Second, I rely on international evidence to explore the likelihood of an abrupt decline in capital flows into the U.S. And third, I analyze the international evidence on current account reversals, to investigate the potential consequences of a (possible) sudden stop of capital flows into the U.S. This analysis suggests that the future adjustment of the U.S. external accounts is likely to result in a significant reduction in growth.

JEL-codes: F02 F43 O11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for
Date: 2005-08
Note: IFM
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