Perspectives on OECD Economic Integration: Implications for US Current Account Adjustment

Maurice Obstfeld and Kenneth Rogoff

Department of Economics, Working Paper Series from Department of Economics, Institute for Business and Economic Research, UC Berkeley

Abstract: The US current account deficit has been persistently large and has brought the country's ratio of foreign debt to GDP to 20%, a figure that is high by historical standards. This paper argues that while US solvency is not a near-term constraint on ongoing deficits, the sheer size of the US economy makes it likely that its current account will have to approach balance in the next five to ten years, if not sooner. The paper surveys a wide body of evidence suggesting that the US economy remains surprisingly closed to external trade in products and capital, and suggests that costs of international trade in goods can explain the evidence. Given the trade costs, a substantial real depreciation of the dollar will be needed to close the US current account gap. If current-account adjustment is gradual, then the medium-term depreciation of the dollar would be on the order of 12%. If the current account deficit is eliminated in a precipitous and disorderly fashion, and the Fed attempts to maintain full employment, the depreciation could be much bigger, even on the order of 40% to 50%.

Keywords: US current account; dollar; real exchange rate; transport costs; home bias (search for similar items in EconPapers)
Date: 2000-09-01
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Citations: View citations in EconPapers (89)

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Related works:
Working Paper: Perspectives on OECD Economic Integration: Implications for US Current Account Adjustment (2001)
Journal Article: Perspectives on OECD economic integration: implications for U.S. current account adjustment (2000)
Working Paper: Perspectives on OECD Economic Integration: Implications for US Current Account Adjustment (2000)
Working Paper: Perspectives on OECD Economic Integration: Implications for US Current Account Adjustment (2000)
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