Is the large U.S. current account deficit sustainable?

Abstract

The U.S. current account deficit has grown steadily since 1991, hitting record levels of 3.6 percent of GDP in 1999 and 4.4 percent in 2000. In recent years, the growing deficits have increasingly raised concerns. For instance, most economists who took part in a recent Wall Street Journal forecasting survey agreed that the current account deficit is the major threat facing the U.S. economy. Some policymakers have also suggested that the large and growing U.S. current account deficit may be unsustainable and thus may create problems for the economy.> Holman examines the causes and consequences of the large current account deficits in the United States. She identifies the potential sources of the large deficits. Much of the rise in the current account deficit over the past decade can be attributed to two factors: accelerating U.S. productivity and a surge in household wealth driven by the stock market. She then examines whether the U.S. current account deficit is sustainable in the near term. In this analysis, an unsustainable deficit is defined as one that triggers a sharp hike in interest rates, a rapid depreciation of the dollar, or some other domestic or global economic disruption. She concludes that, over the near term, deficits of roughly the current magnitude are sustainable and therefore unlikely to disrupt the U.S. economy.Deficit financing