The U.S. Current Account and the Dollar
44 Pages Posted: 26 May 2005
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The U.S. Current Account and the Dollar
Date Written: February 2005
Abstract
There are two main forces behind the large US current account deficits. First, an increase in the US demand for foreign goods. Second, an increase in the foreign demand for US assets. Both forces have contributed to steadily increasing current account deficits since the mid-1990s. This increase has been accompanied by a real dollar appreciation until late 2001, and a real depreciation since. The depreciation has accelerated recently, raising the questions of whether and how much more is to come, and if so, against which currencies, the euro, the yen, or the renminbi. Our purpose in this paper is to explore these issues. Our theoretical contribution is to develop a simple portfolio model of exchange rate and current account determination, and to use it to interpret the past and explore alternative scenarios for the future. Our practical conclusions are that substantially more depreciation is to come, surely against the yen and the renminbi, and probably against the euro.
Keywords: Dollar exchange rate, current account, portfolio models
JEL Classification: E30, F21, F32, F41
Suggested Citation: Suggested Citation
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