The U.S. Current Account and the Dollar

Olivier Blanchard, Francesco Giavazzi () and Filipa Sa

No 11137, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: There are two main forces behind the large U.S. current account deficits. First, an increase in the U.S. demand for foreign goods. Second, an increase in the foreign demand for U.S. 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.

JEL-codes: E3 F21 F32 F41 (search for similar items in EconPapers)
Date: 2005-02
New Economics Papers: this item is included in nep-bec, nep-eec, nep-ifn and nep-mac
Note: EFG IFM
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Citations: View citations in EconPapers (148)

Published as Blanchard, Oliver, Francesco Giavazzi,and Filipa Sa. "International Investors, the U.S. Current Account, and the Dollar." Brookings Papers on Economic Activity 1 (2005): 1-49.

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