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G7 Current Account Imbalances

Sustainability and Adjustment

The current account deficit of the United States is more than six percent of its gross domestic product—an all-time high. And the rest of the world, including other G7 countries such as Japan and Germany, must collectively run current account surpluses to finance this deficit. How long can such unevenness between imports and exports be sustained, and what form might their eventual reconciliation take? Putting forth scenarios ranging from a gradual correction to a crash landing for the dollar, G7 Current Account Imbalances brings together economists from around the globe to consider the origins, status, and future of those disparities.

An esteemed group of collaborators here examines the role of the bursting of the dot-com bubble, the history of previous episodes of current account adjustments, and the possibility of the Euro surpassing the dollar as the leading international reserve currency. Though there are areas of broad agreement—that the imbalances will ultimately decline and that currency revaluations will be part of the solution—many areas of contention remain regarding both the dangers of imbalances and the possible forms of adjustment. 

This volume will be of tremendous value to economists, politicians, and business leaders alike as they look to the future of the G7 economies.

Table of Contents

      Acknowledgement

      Introduction
      Richard H. Clarida

I. ORIGINS OF CURRENT ACCOUNT IMBALANCES

       1. From World Banker to World Venture Capitalist: U.S. External Adjustment and the Exorbitant Privilege
           Pierre-Olivier Gourinchas and Hélène Rey
           Comment: José De Gregorio

       2. A Global Perspective on External Positions
           Philip R. Lane and Gian Maria Milesi-Ferretti
           Comment: Richard Portes

       3. Direct Investment, Rising Real Wages, and the Absorption of Excess Labor in the Periphery
           Michael P. Dooley, David Folkerts-Landau, and Peter Garber
           Comment: Shang-Jin Wei

II. EMPIRICAL STUDIES OF G7 CURRENT ACCOUNT AND EXCHANGE RATE ADJUSTMENT

       4. Current Account Deficits in Industrial Countries: The Bigger They Are, the Harder They Fall?
           Caroline Freund and Frank Warnock
           Comment: Assaf Razin

       5. Are There Thresholds of Current Account Adjustment in the G7?
           Richard H. Clarida, manuela Goretti, and Mark P. Taylor
           Comment: Robert E. Cumby

       6. Current Account Reversals: Always a Problem?
           Muge Adalet and Barry Eichengreen
           Comment: Fredric S. Mishkin

       7. Understanding the U.S. Trade Deficit: A Disaggregated Persepective
           Catherine L. Mann and Katherina Plück
           Comment: Edwin M. Truman

       8. Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?
            Menzie Chinn and Jeffrey A. Frankel
            Comment: Edwin M. Truman

III. THEORETICAL PERSPECTIVES ON CURRENT ACCOUNT SUSTAINABILITY AND ADJUSTMENT

       9. The Unsustainable U.S. Current Account Position Revisited
           Maurice Obstfeld and Kenneth Rogoff
           Comment: Kristin J. Forbes

       10. Smooth Landing or Crash? Model-Based Scenarios of Global Current Account Rebalancing
             Hamid Faruqee, Douglas Laxton, Dirk Muir, and Paolo A. Pesenti
             Comment: Lars E. O. Svensson

       11. The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account
              Aart Kraay and Jaume Ventura
              Comment: Joseph E. Gagnon

Contributors
Author Index
Subject Index

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