Current Account Deficits in Industrial Countries

Caroline Freund and Frank Warnock

in G7 Current Account Imbalances

Published by University of Chicago Press

Published in print May 2007 | ISBN: 9780226107264
Published online February 2013 | e-ISBN: 9780226107288 | DOI:
Current Account Deficits in Industrial Countries

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This chapter investigates the episodes of current account adjustment in industrial countries. The data support the claims that the size of the current account deficit and the extent to which it is financing consumption matter for adjustment. Larger deficits take longer to resolve and are linked with relatively slower income growth during recovery. There is no evidence that the growth in the fiscal balance influences gross domestic product (GDP) growth relative to long-run average. There is a strong inverse correlation between the extent of exchange rate adjustment and the slowdown in GDP growth. Financing does not significantly matter for the adjustment process, indicating that markets are efficient at intermediating funds. The status of the dollar as the reserve currency has crucial implications for adjustment. Deficits driven by investment growth are more benign in terms of exchange rate adjustment than deficits driven by consumption or fiscal spending.

Keywords: current account adjustment; industrial countries; current account deficit; financing; income growth; fiscal balance; gross domestic product; exchange rate

Chapter.  11983 words.  Illustrated.

Subjects: Financial Markets

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