The unsustainable U.S. current account position revisited

Maurice Obstfeld and Kenneth Rogoff

Proceedings, 2005

Abstract: We show that the when one takes into account the global equilibrium ramifications of an unwinding of the US current account deficit, currently running at nearly 6% of GDP, the potential collapse of the dollar becomes considerably larger (more than 50% larger) than our previous estimates (Obstfeld and Rogoff 2000a). It is true that global capital market deepening appears to have accelerated over the past decade (a fact documented by Lane and Milesi-Ferreti (2005) and recently emphasized by US Federal Reserve Chairman Alan Greenspan), and that this deepening may have helped allowed the United States to a record-breaking string of deficits. Unfortunately, however, global capital market deepening turns out to be of only modest help in mitigating the dollar decline that will almost inevitably occur in the wake of global current account adjustment. As the analysis of our earlier papers (2000a, b) showed, and the model of this paper reinforces, adjustments to large current account shifts depend mainly on the flexibility and global integration of goods and factor markets. Whereas the dollar?s decline may be benign as in the 1980s, we argue that the current conjuncture more closely parallels the 1970s, when the Bretton Woods system collapsed. Finally, we use our model to dispel some common misconceptions about what kinds of shifts are needed to help close the US current account imbalance. For example, faster growth abroad helps only if it is relatively concentrated in nontradable goods; faster productivity growth in foreign tradable goods will actually exacerbate the U.S. adjustment problem.

Keywords: Balance of trade; Dollar, American; Investments, Foreign (search for similar items in EconPapers)
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

Downloads: (external link)
https://www.frbsf.org/wp-content/uploads/paper-obstfeld.pdf Full Text (text/html)

Related works:
Chapter: The Unsustainable US Current Account Position Revisited (2007)
Journal Article: The unsustainable U.S. current account position revisited (2005)
Working Paper: The Unsustainable US Current Account Position Revisited* (2005)
Working Paper: The Unsustainable US Current Account Position Revisited* (2005)
Working Paper: The Unsustainable US Current Account Position Revisited (2005)
Working Paper: The Unsustainable US Current Account Position Revisited (2004)
Working Paper: The Unsustainable U S Current Account Position Revisited
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfpr:y:2005:x:16

Ordering information: This journal article can be ordered from

Access Statistics for this article

More articles in Proceedings from Federal Reserve Bank of San Francisco Contact information at EDIRC.
Bibliographic data for series maintained by Federal Reserve Bank of San Francisco Research Library ().