TY  - JOUR
AU  - Dooley,Michael P.
AU  - Folkerts-Landau,David
AU  - Garber,Peter M.
TI  - The US Current Account Deficit and Economic Development: Collateral for a Total Return Swap
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10727
PY  - 2004
Y2  - September 2004
UR  - http://www.nber.org/papers/w10727
L1  - http://www.nber.org/papers/w10727.pdf
N1  - Author contact info:
Michael P. Dooley
Department of Economics
Engineering II
University of California, Santa Cruz
Santa Cruz, CA 95064
Tel: 831/459 3662
Fax: 831/459-5077
E-Mail: MPD@UCSC.EDU

David Folkerts-Landau
Deutsche Bank
Deutsche Bank AG London
1 Great Winchester Street
London EC2 2EQ
United Kingdom
E-Mail: david.folkerts-landau@db.com

Peter M. Garber
Deutsche Bank
60 Wall Street
New York, NY 10005
Tel: 212/250-5466
Fax: 212/250-2628
E-Mail: peter.garber@db.com
AB  - We argue that a chronic US current account deficit is an integral and sustainable feature of a successful international monetary system.  The US deficit supplies international collateral to the periphery.  International collateral in turn supports two-way trade in financial assets that liberates capital formation in poor countries from inefficient domestic financial markets.  The implicit international contract is analogous to a total return swap in domestic financial markets. Using market-determined collateral arrangements from these transactions we compute the collateral requirements consistent with recent foreign direct investment in China.  The data are remarkably consistent with such calculations.  The analysis helps explain why net capital flows from poor to rich countries and recent evidence that net outflows of capital are associated with relatively high growth rates in emerging markets.  It also clarifies the role of the reserve currency in the system.
ER  -