Working Paper: NBER ID: w2729
Authors: Robert J. Hodrick
Abstract: This paper examines several aspects of the debate about the causes of the U.S. current account deficit in the 1980's. It surveys several popular explanations before developing two theoretical models of international capital flows. The first model is Ricardian, and it extends the analysis of Stockman and Svensson (1987): The second model is an overlapping generations framework. The major difference in predictions of these two models involves the effects of government budget deficits on the exchange rate and the current account. An update of the empirical investigation of Evans (1986) suggests that his VAR methodology is completely uninformative with additional data. Some empirical results on the importance of risk aversion in modeling international capital market equilibrium are also presented.
Keywords: US current account deficit; international capital flows; government budget deficits; Ricardian model; overlapping generations model
JEL Codes: E21; F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government budget deficits (H69) | capital flows (F32) |
| government budget deficits (H69) | consumption and savings decisions (E21) |
| consumption and savings decisions (E21) | capital flows (F32) |
| government budget deficits (H69) | real exchange rate (F31) |
| higher government spending (H59) | real appreciation of the dollar (F31) |