The U.S. current account deficit and the expected share of world output

By Charles M. Engel, J. Rogers. 2006

195 citations recorded by the source corpus.

We investigate the possibility that the large current account deficits of the U.S. are the outcome of optimizing behavior. We develop a simple long-run world equilibrium model in which the current account is determined by the expected discounted present value of its future share of world GDP relative to its current share of world GDP. The model suggests that under some reasonable assumptions about future U.S. GDP growth relative to the rest of the advanced countries -- more modest than the growth over the past 20 years -- the current account deficit is near optimal levels. We then explore the implications for the real exchange rate. Under some plausible assumptions, the model implies little change in the real exchange rate over the adjustment path, though the conclusion is sensitive to assumptions about tastes and technology. Then we turn to empirical evidence. A test of current account sustainability suggests that the U.S. is not keeping on a long-run sustainable path. A direct test of our model finds that the dynamics of the U.S. current account -- the increasing deficits over the past decade -- are difficult to explain under a particular statistical model (Markov-switching) of expectations of future U.S. growth. But, if we use survey data on forecasted GDP growth in the G7, our very simple model appears to explain the evolution of the U.S. current account remarkably well. We conclude that expectations of robust performance of the U.S. economy relative to the rest of the advanced countries is a contender -- though not the only legitimate contender -- for explaining the U.S.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/71a0168a279d359f6a7dd83e1253745024149766

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Citations in the corpus

The Missing Wealth of Nations: Are Europe and the U.S. net Debtors or net Creditors? (2013, background): “and Kraay (2006), Engel and Rogers (2006), Caballero, Farhi, and Gourinchas”
Asset Prices, Exchange Rates and the Current Account (2007, background): “…potentially be large (e.g. Obstfeld and Rogo¤, 2005; Blanchard et al., 2005), while others point out that such implications are not necessarily borne out by all models and that, under some scenarios, required exchange rate changes may be smaller (Engel and Rogers, 2006; Cavallo and Tille, 2006).”
A Forensic Analysis of Global Imbalances (2011, methodology): “Chinn and Lee (2009) apply a structural VAR approach, which allows for transitory and permanent shocks to drive the current 5 A formal test of the intertemporal approach, as applied to the recent US experience, was conducted by Engel and Rogers (2006).”