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The US Current Account and the Dollar

Olivier Blanchard (), Francesco Giavazzi () and Filipa Sa ()

No 4888, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: There are two main forces behind the large US current account deficits. First, an increase in the US demand for foreign goods. Second, an increase in the foreign demand for US assets. Both forces have contributed to steadily increasing current account deficits since the mid-1990s. This increase has been accompanied by a real dollar appreciation until late 2001, and a real depreciation since. The depreciation has accelerated recently, raising the questions of whether and how much more is to come, and if so, against which currencies, the euro, the yen, or the renminbi. Our purpose in this paper is to explore these issues. Our theoretical contribution is to develop a simple portfolio model of exchange rate and current account determination, and to use it to interpret the past and explore alternative scenarios for the future. Our practical conclusions are that substantially more depreciation is to come, surely against the yen and the renminbi, and probably against the euro.

Keywords: current account; dollar exchange rate; portfolio models (search for similar items in EconPapers)
JEL-codes: E30 F21 F32 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-ifn and nep-mac
Date: 2005-02
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