Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate
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NBER Working Paper No. 13952
Issued in April 2008
NBER Program(s): IFM ITI
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.
Published: Martin Feldstein, 2008.
"Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate,"
Journal of Economic Perspectives,
American Economic Association, vol. 22(3), pages 113-25, Summer.
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