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Is the U.S. Current Account Deficit Sustainable

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Congressional rept.

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Americas current account CA deficit the trade deficit plus net income payments and net unilateral transfers rose as a share of gross domestic product GDP from 1991 to a record high of about 6 of GDP in 2006. It began falling in 2007, and reached 3 of GDP in 2009. The CA deficit is financed by foreign capital inflows. Many observers have questioned whether such large inflows are sustainable. Even at 3 of GDP, the deficit is probably still too large to be permanently sustained, and many economists fear that the decline is temporary and caused by the recession. Further, a large share of the capital inflows have come from foreign central banks in recent years, and some are concerned about the economic and political implications of this reliance. Some fear that a rapid decline in capital inflows would trigger a sharp drop in the value of the dollar and an increase in interest rates that could lower asset values and disrupt economic activity. However, economic theory and empirical evidence suggest that the most plausible scenario is a slow decline in the CA deficit, which would not greatly disrupt economic activity because production in the traded goods sector would be stimulated. The financial crisis that worsened in September 2008 would seem to be a good test case of the type of event that could lead to the feared sudden stop in foreigners willingness to finance the CA deficit. While the recession deepened following the crisis, it has not been via a sudden decline in the dollar or a sudden broad spike in U.S. interest rates. On the contrary, the dollar appreciated in value in the months after the crisis and foreign demand for U.S. Treasury bonds has risen since the crisis worsened. On the other hand, there was a large decline in private foreign capital inflows beginning in 2008 had it not been for foreign government purchases of U.S. securities, the CA would have been in surplus in 2009, all else equal.

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  • Economics and Cost Analysis

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