The US Current Account Deficit: A Re-examination of the Role of Private Saving

Charles Engel

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: The large recent US current account deficits have been the subject of an enormous amount of study in academia, among government and central bank economists, in business economic reports, and in the press. Many different explanations of the cause of the deficit have been offered, and to varying degrees we believe that all may have played a role: low private saving in the US; large public-sector budget deficits; a ‘glut’ of savings in the rest of world; and, perhaps even a misalignment of nominal exchange rates. In this paper we explore the role of one other factor that also has been mentioned prominently: private saving in the US is low because income growth is expected to be strong. We rework the standard neoclassical two-country model to show how a country will be a net borrower when its future share of world GDP is expected to increase above its current share. Our research ultimately is motivated by the question of whether the US current account is ‘sustainable’. The way we approach the question is to see whether the high level of US spending currently is compatible with an optimal path of borrowing. In particular, what assumptions about expected future growth of the US’s share of world output could justify its current account deficit? We show that if the deficit can be explained by higher future income shares, then the size of the real depreciation, that may otherwise be required to reduce the deficit, may be quite small.

Keywords: current account adjustment; saving (search for similar items in EconPapers)
JEL-codes: F21 F32 F41 (search for similar items in EconPapers)
Date: 2005-11
New Economics Papers: this item is included in nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.rba.gov.au/publications/rdp/2005/pdf/rdp2005-09.pdf (application/pdf)

Related works:
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:rba:rbardp:rdp2005-09

Access Statistics for this paper

More papers in RBA Research Discussion Papers from Reserve Bank of Australia Contact information at EDIRC.
Bibliographic data for series maintained by Paula Drew ().