Working Paper: CEPR ID: DP7046
Authors: Gian Maria Milesi-Ferretti
Abstract: In mid-2008, the real effective exchange rate of the dollar was close to its minimum level for the past 4 decades. At the same time, however, the U.S. trade and current account deficits remain large and, absent a significant correction in coming years, would contribute to a further accumulation of U.S. external liabilities. The paper discusses the tension between these two aspects of the dollar assessment, and what factors can help reconcile them. It focuses in particular on the terms of trade, adjustment lags, and measurement issues related to both the real effective exchange rate and the current account balance.
Keywords: current account; real exchange rate; terms of trade
JEL Codes: F31; F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Depreciation of the dollar (F31) | Reduction in the U.S. current account deficit (F32) |
| Weakening of the dollar (F31) | Reduction in the current account deficit (F32) |
| High oil prices (Q31) | Deteriorating terms of trade (F14) |
| Deteriorating terms of trade (F14) | Worsening trade balance (F14) |
| Rate of return on external assets (G19) | Expected outcomes of the current account balance (F32) |