Characterizing Movements of the U.S. Current Account Deficit

19 Pages Posted: 8 Dec 2004

See all articles by Torge Middendorf

Torge Middendorf

Rhine-Westphalia Institute for Economic Research (RWI-Essen)

Torsten Schmidt

Rhine-Westphalia Institute for Economic Research (RWI)

Date Written: 2004

Abstract

It is unclear whether the exceptionally high U.S. current account deficit can be sustained for a prolonged period. In this paper we approach the topic whether a gradual adjustment or a pronounced reduction of the deficit is likely to occur. We therefore characterize the dynamics of the current account deficit movements by a three-regime Markov-Switching model. Our finding is that it is possible to distinguish a regime of a strong increasing deficit, a just slightly increasing deficit and a regime of a deficit reduction. Furthermore we find that movements of the deficit are asymmetric. Whereas expansions of the current account deficit are long lasting, reductions of the deficit are rather short. This implies that a pronounced reduction is not likely to occur. Secondly we try to uncover determinants of regime shifts of the current account. Applying ordered Logit models we conclude that a combination of U.S. inflation, U.S. investment and share prices predicts pronounced changes in the current account deficit quite reliably.

Keywords: Markov-Switching Model, Ordered Logit, Indicators

JEL Classification: C22, C25, F32

Suggested Citation

Middendorf, Torge and Schmidt, Torsten, Characterizing Movements of the U.S. Current Account Deficit (2004). RWI: Discussion Paper No. 24, Available at SSRN: https://ssrn.com/abstract=628461 or http://dx.doi.org/10.2139/ssrn.628461

Torge Middendorf

Rhine-Westphalia Institute for Economic Research (RWI-Essen) ( email )

Hohenzollernstr. 1-3
45128 Essen
Germany

Torsten Schmidt (Contact Author)

Rhine-Westphalia Institute for Economic Research (RWI) ( email )

45128 Essen
Germany