Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate

Martin S. Feldstein

No 13952, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The large trade and current account deficits of the United States cannot continue indefinitely because doing so would constitute a permanent gift to the U.S. economy. The process that will cause this gift to shrink and that will eventually cause it to reverse is a fall in the dollar. The dollar will fall as private investors and governments become unwilling to accept the risk of increasing amounts of dollars in their portfolios, especially in a context in which they realize that the dollar must fall to reduce the trade imbalance. Although a more competitive dollar is the mechanism that will cause the U.S. trade deficit to decline, the fundamental requirement for a lower trade deficit is an increase in the U.S. national saving rate. So a rise will be driven by higher household savings of the coming years as the two primary forces that depressed savings in recent years are reversed: the exceptionally rapid rise in household wealth and the high level of mortgage refinancing with equity withdrawal.

JEL-codes: F1 F3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-int
Date: 2008-04
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