Is the U.S. Current Account Deficit Sustainable? And If Not, How Costly is Adjustment Likely To Be?

Sebastian Edwards

NBER Working Paper No. 11541
Issued in August 2005
NBER Program(s):   IFM

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.

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Published: Edwards, Sebvastian. "Is The U.S. Current Account Deficit Sustainable? If Not, How Costly Is Adjustment Likely To Be?," Brookings Papers on Economic Activity, 2005, v2005(1), 211-288.

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