Working Paper: NBER ID: w13952
Authors: Martin S. Feldstein
Abstract: The large trade and current account deficits of the United States cannot continue indefinitely because doing so would constitute a permanent gift to the U.S. economy. The process that will cause this gift to shrink and that will eventually cause it to reverse is a fall in the dollar. The dollar will fall as private investors and governments become unwilling to accept the risk of increasing amounts of dollars in their portfolios, especially in a context in which they realize that the dollar must fall to reduce the trade imbalance. Although a more competitive dollar is the mechanism that will cause the U.S. trade deficit to decline, the fundamental requirement for a lower trade deficit is an increase in the U.S. national saving rate. So a rise will be driven by higher household savings of the coming years as the two primary forces that depressed savings in recent years are reversed: the exceptionally rapid rise in household wealth and the high level of mortgage refinancing with equity withdrawal.
Keywords: No keywords provided
JEL Codes: F1; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade Deficit (F14) | Value of the Dollar (F31) |
| Value of the Dollar (F31) | Trade Deficit (F14) |
| Value of the Dollar (F31) | National Saving Rate (D14) |
| National Saving Rate (D14) | Trade Deficit (F14) |
| Value of the Dollar (F31) | Exports (F10) |
| Value of the Dollar (F31) | Imports (F14) |
| Trade Deficit (F14) | National Saving Rate (D14) |