Is The U S Current Account Deficit Sustainable
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Is The U S Current Account Deficit Sustainable
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Author :
language : en
Publisher:
Release Date : 2010
Is The U S Current Account Deficit Sustainable written by and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with categories.
America's current account (CA) deficit (the trade deficit plus net income payments and net unilateral transfers) rose as a share of gross domestic product (GDP) from 1991 to a record high of about 6% of GDP in 2006. It began falling in 2007, and reached 3% of GDP in 2009. The CA deficit is financed by foreign capital inflows. Many observers have questioned whether such large inflows are sustainable. Even at 3% of GDP, the deficit is probably still too large to be permanently sustained, and many economists fear that the decline is temporary and caused by the recession. Further, a large share of the capital inflows have come from foreign central banks in recent years, and some are concerned about the economic and political implications of this reliance. Some fear that a rapid decline in capital inflows would trigger a sharp drop in the value of the dollar and an increase in interest rates that could lower asset values and disrupt economic activity. However, economic theory and empirical evidence suggest that the most plausible scenario is a slow decline in the CA deficit, which would not greatly disrupt economic activity because production in the traded goods sector would be stimulated. The financial crisis that worsened in September 2008 would seem to be a good test case of the type of event that could lead to the feared "sudden stop" in foreigners' willingness to finance the CA deficit. While the recession deepened following the crisis, it has not been via a sudden decline in the dollar or a sudden broad spike in U.S. interest rates. On the contrary, the dollar appreciated in value in the months after the crisis and foreign demand for U.S. Treasury bonds has risen since the crisis worsened. On the other hand, there was a large decline in private foreign capital inflows beginning in 2008; had it not been for foreign government purchases of U.S. securities, the CA would have been in surplus in 2009, all else equal.
Is The U S Current Account Deficit Sustainable
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Author : Sebastian Edwards
language : en
Publisher:
Release Date : 2005
Is The U S Current Account Deficit Sustainable written by Sebastian Edwards and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005 with Fiscal policy categories.
"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"--National Bureau of Economic Research web site.
Is The U S Trade Deficit Sustainable
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Author : Catherine L. Mann
language : en
Publisher: Peterson Institute
Release Date : 1999
Is The U S Trade Deficit Sustainable written by Catherine L. Mann and has been published by Peterson Institute this book supported file pdf, txt, epub, kindle and other format this book has been release on 1999 with Business & Economics categories.
The global financial crisis of 1997-98 and the widening US trade deficit have precipitated fresh inquiry into a set of perennial questions about global integration and the US economy. How has global integration affected US producers and workers, and overall growth and inflation? Is a chronic and widening deficit sustainable, or will the dollar crash, perhaps taking the economy with it? If the problem was one of "twin deficits," as many thought, why has the trade deficit continued to grow even as the budget deficit narrowed to zero? If US companies are so competitive, why does the trade deficit persist? Is the trade deficit a result of protectionism abroad? Will it lead to protectionism at home? What role do international capital markets have? Each chapter presents relevant data and a simple analytical framework as the basis for concise discussions of these major issues. The final section of the book provides an outlook for the deficit and suggests alternative policy courses for dealing with it. This book is designed for policymakers and others who are interested in the US role in the world economy. It is also suitable for courses in international economics, business, and international affairs.
Is The U S Current Account Deficit Sustainable
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Author :
language : en
Publisher:
Release Date : 2005
Is The U S Current Account Deficit Sustainable written by and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005 with categories.
America's current account (CA) deficit (the trade deficit plus net income payments and net unilateral transfers) has been rising as a share of gross domestic product (GDP) since 1991. In the first half of 2005, the CA deficit reached a record high of 5.7% of GDP. The CA deficit is financed by foreign capital inflows. Many observers have questioned whether such inflows are sustainable and expressed concern about the economic impact should foreign capital inflows decline rapidly. Some fear that a rapid decline in the CA deficit could cause a recession because, presumably, a decline in the CA deficit would trigger a sharp drop in the value of the dollar and a rise in interest rates (which could lower asset values). However, economic theory and empirical evidence suggest that should the CA deficit decline slowly, economic activity would not be greatly disrupted because production in the trade sector would be stimulated. Thus, the main issue of interest to policymakers may be whether a decline in the deficit would be gradual or sudden. From 2000-2002, gross foreign private capital inflows declined sharply, from about $1 trillion to $600 billion a year. However, this reduction did not result in a decline in the CA deficit for two reasons. First, gross private capital outflows also declined. Second, private inflows were replaced by official inflows, as some foreign central banks increased their foreign reserve holdings. One long-term consequence of a large CA deficit has been the growing foreign ownership of U.S. capital stock. A large CA deficit is not sustainable in the long run because it increases U.S. net debt to foreigners, which cannot rise without limit. A larger debt can be serviced only through higher borrowing or higher net exports. For net exports to rise, all else equal, the value of the dollar must fall. This explains why many economists believe that both the dollar and the CA deficit will fall at some point in the future. To date, debt service has not been burdensome. Because U.S. holdings of foreign assets have earned a higher rate of return than U.S. debt owed to foreigners, U.S. net investment income has remained positive, despite the fact that the United States is a net debtor nation. Most episodes of a declining CA deficit in industrialized countries since 1980 were associated with slow economic growth. Only two episodes were associated with a severe disruption in economic activity. Because most of the episodes involved small countries, these cases may differ fundamentally from similar episodes in the United States. Historically, a few other countries have had a higher net foreign debtto-GDP ratio than the United States has at present; however, if CA deficits continue at current levels, the U.S. net foreign debt could be the highest ever recorded within a few decades. This report reviews studies on the CA deficit's sustainability. The studies suggest that a dollar depreciation of 10% to 56% could eventually be required to restore sustainability. This report will be updated as events warrant.
The U S Current Account Deficit Whose Problem Is It
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Author : Hauke Barschel
language : en
Publisher: GRIN Verlag
Release Date : 2007-12-10
The U S Current Account Deficit Whose Problem Is It written by Hauke Barschel and has been published by GRIN Verlag this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007-12-10 with Business & Economics categories.
Seminar paper from the year 2004 in the subject Economics - International Economic Relations, grade: 1,7 (A-), Anglia Ruskin University (Ashcroft International Business School), language: English, abstract: Since the beginning of the 1980s in almost every year the United States (US or USA) current account has shown a deficit. After a brief overview about the components of a country's current account this work provides an analysis of the US deficit's effects on the US economy. Furthermore it investigates effects on economies outside the US in order to verify whose problem it is.
Is The U S Current Account Deficit Sustainable And If Not How Costly Is Adjustment Likel To Be
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Author : Sebastian Edwards
language : en
Publisher:
Release Date : 2005
Is The U S Current Account Deficit Sustainable And If Not How Costly Is Adjustment Likel To Be written by Sebastian Edwards and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005 with categories.
How Long Can The Unsustainable U S Current Account Deficit Be Sustained
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Author : Carol C. Bertaut
language : en
Publisher:
Release Date : 2008
How Long Can The Unsustainable U S Current Account Deficit Be Sustained written by Carol C. Bertaut and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with Budget deficits categories.
This paper addresses three questions about the prospects for the U.S. current account deficit. Is it sustainable in the long term? If not, how long will it take for measures of external debt and debt service to reach levels that could prompt some pullback by global investors? And if and when such levels are breached, how readily would asset prices respond and the current account start to narrow? To address these questions, we start with projections of a detailed partial-equilibrium model of the U.S. balance of payments. Based on plausible assumptions of the key drivers of the U.S. external balance, they indicate that the current account deficit will resume widening and the negative NIIP/GDP ratio will continue to expand. However, our projections suggest that even by the year 2020, the negative NIIP/GDP ratio will be no higher than it is in several industrial economies today, and U.S. net investment income payments will remain very low. The share of U.S. claims in foreigners' portfolios will likely rise, but not to an obviously worrisome extent. All told, it seems likely it would take many years for the U.S. debt to cumulate to a level that would test global investors' willingness to extend financing. Finally, we explore the historical responsiveness of asset prices and the current account in industrial economies to measures of external imbalances and debt. We find little evidence that, as countries' net indebtedness rises, the developments needed to correct the current account--including changes in growth rates, asset prices, or exchange rates--materialize all that rapidly. We would emphasize that these findings do not imply that U.S. current account adjustment is necessarily many years away, as any number of factors could trigger such adjustment. Our point is rather that international balance sheet considerations likely are not sufficient, by themselves, to require external adjustment any time soon.
Is The U S Current Account Deficit Sustainable
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Author :
language : en
Publisher:
Release Date : 2010
Is The U S Current Account Deficit Sustainable written by and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with categories.
America's current account (CA) deficit (the trade deficit plus net income payments and net unilateral transfers) rose as a share of gross domestic product (GDP) from 1991 to a record high of about 6% of GDP in 2006. It began falling in 2007, and reached 3% of GDP in 2009. The CA deficit is financed by foreign capital inflows. Many observers have questioned whether such large inflows are sustainable. Even at 3% of GDP, the deficit is probably still too large to be permanently sustained, and many economists fear that the decline is temporary and caused by the recession. Further, a large share of the capital inflows have come from foreign central banks in recent years, and some are concerned about the economic and political implications of this reliance. Some fear that a rapid decline in capital inflows would trigger a sharp drop in the value of the dollar and an increase in interest rates that could lower asset values and disrupt economic activity. However, economic theory and empirical evidence suggest that the most plausible scenario is a slow decline in the CA deficit, which would not greatly disrupt economic activity because production in the traded goods sector would be stimulated. The financial crisis that worsened in September 2008 would seem to be a good test case of the type of event that could lead to the feared "sudden stop" in foreigners' willingness to finance the CA deficit. While the recession deepened following the crisis, it has not been via a sudden decline in the dollar or a sudden broad spike in U.S. interest rates. On the contrary, the dollar appreciated in value in the months after the crisis and foreign demand for U.S. Treasury bonds has risen since the crisis worsened. On the other hand, there was a large decline in private foreign capital inflows beginning in 2008; had it not been for foreign government purchases of U.S. securities, the CA would have been in surplus in 2009, all else equal.
Untangling The Us Deficit
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Author : Richard A. Iley
language : en
Publisher: Edward Elgar Publishing
Release Date : 2007-01-01
Untangling The Us Deficit written by Richard A. Iley and has been published by Edward Elgar Publishing this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007-01-01 with Business & Economics categories.
The book would be a good companion text for an undergraduate class in international finance or open-economy macroeconomics. Catherine L. Mann, Journal of Economic Literature Untangling the US Deficit is a unique and well-researched book and will be of great interest to academic economists and postgraduates. Policymakers, business and market economists will also find it an enlightening and challenging analysis. sirreadalot.org The book is written in a very accessible fashion, even though the authors strive to accommodate competing and complex views on the causes and cures of the US external deficit, which makes for enjoyable and informative reading. Their reliance on data, charts and bibliography result in persuasive arguments. Recommended. General readers; upper-division undergraduates through practitioners. A. Sharma, Choice What are the causes of the US current account deficit? Are the problems made in the US or the rest of the world? Are these deficits sustainable, at what level? These are the types of questions the authors set out to answer, and in essence conclude that the answers do not matter for global stability as long as imbalances are left to market forces and the US can avoid large net income outflows. The beauty of this book, however, is watching the authors (the unusual combination of a business economist and an academic economist) arrive at this conclusion. They provide insights that can come only from years of practical and theoretical experience. William E. Becker, Indiana University Bloomington, US As the US current account deficit has expanded to a record level of $811 billion in 2006, debate about the deficit s causes and consequences has also grown. Is the deficit a product of American profligacy or a glut of savings in the rest of the world? Is it a serious problem or essentially benign? Untangling the US Deficit charts a course between the competing explanations in a systematic and rigorous approach, incorporating the latest academic research and market data. Particular attention is given to the China United States trade imbalance and to the special role of the US dollar and US capital markets in global finance. This unique and well-researched book will be of great interest to academic economists and postgraduates. Policy-makers, business and market economists will also find it to be an enlightening and challenging account.
A Record Current Account Deficit
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Author : Jack L. Hervey
language : en
Publisher:
Release Date : 2001
A Record Current Account Deficit written by Jack L. Hervey and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2001 with categories.
The U.S. deficit in international trade soared to new heights in 1998, again in 1999, and in all likelihood, will increase even further this year. Mirroring these deficits have been huge foreign capital inflows. In 1999, the U.S. current account deficit, that is, the difference between exports and imports of goods, services, receipts and payments of income from and to foreigners, and unilateral transfers, totaled $331 billion or 3.6 percent of nominal gross domestic product (GDP). This record deficit compares with the previous record of $217 billion (2.5 percent of GDP) in 1998 and $141 billion (1.7 percent of GDP) in 1997. The magnitude of the recent year-to-year increases in this deficit, as well as its absolute dollar size, has raised considerable concern among many public and private observers of the U.S. economy. Not since 1987, when the current account deficit peaked at a then record $161 billion, has the condition of the U.S. international accounts so captured the attention of economists, policymakers, and the popular press. Further compounding uneasiness about the current situation is the expectation by many economists that the magnitude of the trade deficit will show a further increase this year, and that only a modest reduction, if any, is likely in 2001. Indeed, trade developments thus far in 2000 indicate that at least the first half of that expectation (that is, an increase in the year-to-year size of the deficit during 2000) will be borne out. There are also fears surrounding an eventual economic adjustment, "the current account gap is the single biggest threat to the current expansion of the economy."1 There is nothing inherently "bad" (or "good") about a current account deficit, or for that matter, a current account surplus. However, the concern about the deficit that has drawn the attention of reasonable observers centers on a specific issue: Does the size of the deficit (or the recent rapid increase) in the U.S. international accounts represent a risk to our economic well-being in the near term or in the longer term? To answer this question, we need to identify the underlying cause of the deficit. What developments during the past two or three years, in the domestic economy and in the rest of the world, have led the U.S. to purchase dramatically more goods and services from abroad than it sold abroad? Furthermore, can the U.S. economy maintain a deficit of this magnitude? And, if not, what are the likely implications of an adjustment for the U.S. economy? Three rationales are commonly used to explain the sudden and dramatic increase in the U.S. current account deficit. The first rationale contends that U.S. consumers have shifted their preferences from saving for the future, witness the near zero personal savings rate, toward purchasing more consumption goods in the present.2 This surge in demand for domestic consumption goods translates into a corresponding increase in imported consumption goods. We call this the consumption boom hypothesis. Certainly, trade in consumer type goods has increased in recent years. Indeed, more than 60 percent ($52 billion) of the year-to-year increase in the goods trade deficit between 1998 and 1999 was accounted for by the year-to-year increase in consumer goods, foods and beverages, and automotive imports (most of which are broadly classed as consumer goods). If the consumption boom story is true, it implies that there has been excessive borrowing from abroad to finance a domestic consumption binge. And according to this argument, since this borrowing has not gone toward enhancing productivity, the economy will be forced to suffer a decline in consumption in the future as resources are diverted away from production for domestic use toward production to service the foreign debt. A second hypothesis suggests that the financial/exchange rate crises in Asia, Russia, and Brazil from mid-1997 through early 1999 contributed to a "safe haven" inflow of short-term foreign capital into U.S. markets.3 Briefly, the idea here is that the flight of capital from the foreign economies takes away from the productive and consuming capacity of those economies; it not only detracts from the capacity of their domestic economies to perform, but it also reduces their capacity to import from foreign markets, namely, the U.S. From the U.S. perspective, this flight of foreign capital into the economy does two things, it makes it more difficult for the U.S. to export goods and services to these now poorer performing foreign markets and it facilitates (makes cheaper, in terms of dollars) the U.S. importation of goods and services from these countries. Thus, other things remaining the same, the U.S. deficit increases. We call this the safe haven hypothesis. The concern implicit within this explanation for the capital inflow is that economic recovery and increased stability abroad might result in an abrupt and substantial outflow of short-term capital, with resulting disruption in U.S. financial markets. A third potential explanation for the recent rapid increase in the current account deficit is associated with the technological restructuring of the U.S. economy. This hypothesis implies that a technology shift in the economy (largely related to the assimilation of advances in computer and communication technology) has increased the level of productivity, and returns on investment, in the economy. Demand for investment has increased in response to this technology shift, which in turn has stimulated the inflow (supply) of foreign capital in support of this new type of investment. We call this the technological change hypothesis. There is less concern about an eventual adverse adjustment in the economy in this case, because this hypothesis implies that productivity-enhancing investment will result in increased output in the economy, thereby facilitating the servicing and eventual repayment of the increased level of borrowing from abroad (the larger trade/current account deficit).4 Before we can examine the relationship between the international accounts and the domestic economy, we need to understand how these international transactions work. In the next section, we set out a simple framework for understanding these relationships, based on national income accounting identities. We then review the three hypotheses outlined above, which seek to explain the recent rapid increase in the current account deficit/capital inflow, and analyze how well they match the available evidence. Finally, we consider whether the deficit is sustainable and, if not, what the implications of each hypothesis might be for an eventual adjustment in the U.S. economy. We find little support for the consumption boom explanation in the data. While consumption has increased, its share of total expenditures has declined. We find some evidence to support the safe haven rationale for the increase in capital inflows. However, because much of the capital inflow appears to represent long-term investment rather than a short-term flight to safety, we do not find the implications of this story to be particularly worrisome for the health of the U.S. economy. In other words, our view is that an unwinding of such capital inflows is unlikely to be overly disruptive to domestic financial markets. Finally, we find the technological change argument to have some merit. Much of the recent increase in goods imports has been in the "investment" goods categories-capital equipment, intermediate capital equipment components, and industrial supplies used in the production of capital goods. Recent gains in productivity measures and continuing structural changes across the spectrum of U.S. industry suggest that the economy may be shifting to a new and higher level of potential output. An economy in the process of such a shift has an incentive to increase borrowing from abroad to fulfill the increased demand for investment. We believe that the available data on the current U.S. economic environment fit well with this scenario.