Working Paper: NBER ID: w11541
Authors: Sebastian Edwards
Abstract: In this paper I analyze the relationship between the U.S. dollar and the U.S. current account. I deal with issues of sustainability, and I discuss the mechanics of current account adjustment. The analysis presented in this paper differs from other work in several respects: First, I emphasis the dynamics of the current account adjustment, going beyond computations of the "required" real depreciation of the dollar to achieve sustainability. I show that even if foreigners' (net) demand for U.S. assets continues to increase significantly, the current account deficit is likely to experience a large decline in the (not too distant) future. Second, I rely on international evidence to explore the likelihood of an abrupt decline in capital flows into the U.S. And third, I analyze the international evidence on current account reversals, to investigate the potential consequences of a (possible) sudden stop of capital flows into the U.S. This analysis suggests that the future adjustment of the U.S. external accounts is likely to result in a significant reduction in growth.
Keywords: No keywords provided
JEL Codes: F02; F43; O11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign asset demand increases (G15) | Current account balance (F32) |
| Current account balance (F32) | Current account reversal (F32) |
| Current account reversal (F32) | GDP growth (O49) |
| Foreign investors' willingness to hold US assets (G15) | Current account balance (F32) |
| Current account balance (F32) | Real exchange rates (F31) |