Perspectives on U.S. external deficits

M. Akbar Akhtar

No 9505, Research Paper from Federal Reserve Bank of New York

Abstract: The paper examines the evolution of U.S. external balances since 1980 and considers various explanations for the persistence of external deficits in the late 1980s and the 1990s. It also offers a general assessment of the medium-term prospects for U.S. current account deficits. The review of evidence indicates that the huge increase in U.S. external deficits over 1980-86 was largely driven by an upward shift in Federal fiscal deficits and that lower Federal deficits together with the dollar depreciation played a crucial role in improving external balances during the second half of the 1980s. The improvement was not large enough, however, to defuse the external deficit problem. Indeed, the U.S. economy continued to experience substantial trade and current account deficits in the late 1980s and the early 1990s. Developments in Federal deficits or, more generally, changes in macroeconomic policies are not sufficient for explaining the persistence of external deficits. Other factors that made important contributions to the persistence of external deficits include supply-side effects of large exchange rate changes, increased trade competition between the U.S. and low-wage economies, and greater international capital mobility. Looking to the future, the paper suggests that in the medium run the U.S. current account deficit might stabilize around 1 - 2 percent of GDP. This scenario assumes that foreign private capital inflows would continue to finance the U.S. external deficits without any serious disruptions and that U.S. fiscal policy initiatives would keep the Federal budget deficit around 2 percent of GDP.

Keywords: Debts, External; International trade; Balance of trade (search for similar items in EconPapers)
Date: 1995
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