DP7046 Fundamentals at Odds? The US Current Account Deficit and The Dollar

Author(s): Gian Maria Milesi-Ferretti
Publication Date: November 2008
Keyword(s): current account, real exchange rate, terms of trade
JEL(s): F31, F32, F41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7046

In mid-2008, the real effective exchange rate of the dollar was close to its minimum level for the past 4 decades. At the same time, however, the U.S. trade and current account deficits remain large and, absent a significant correction in coming years, would contribute to a further accumulation of U.S. external liabilities. The paper discusses the tension between these two aspects of the dollar assessment, and what factors can help reconcile them. It focuses in particular on the terms of trade, adjustment lags, and measurement issues related to both the real effective exchange rate and the current account balance.