United States current account deficits: A stochastic optimal control analysis 1

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1 University Press Scholarship Online You are looking at 1-10 of 19 items for: keywords : current account deficits United States current account deficits: A stochastic optimal control analysis 1 in Stochastic Optimal Control, International Finance, and Debt Crises Published in print: 2006 Published Online: May 2006 ISBN: eisbn: DOI: / For nearly a quarter of a century, the US has persistently run significant current account deficits that transformed it from the world s largest net creditor to its largest debtor. The stochastic optimal control/dynamic programming approach provides a framework to derive the optimal debt ratio, based upon both objective variables and preferences. The following set of questions are answered: What is a sustainable ratio of external debt/gdp? What are the consequences of an excessive debt? By how much does the dollar need to decline in order to achieve a sustainable current account position for the US and rest of world? The deviation of the actual debt ratio from the derived optimum increases the vulnerability of the economy to external shocks. The transition economies: A NATREX evaluation of research 1 in Stochastic Optimal Control, International Finance, and Debt Crises Published in print: 2006 Published Online: May 2006 ISBN: eisbn: DOI: / On the basis of the NATREX model, several key studies are evaluated to answer the questions: How can the trends in the real exchange rates of the transition economies of Eastern Europe be explained? What are sustainable and equilibrium real exchange rates, current account deficits, and net investment positions in the medium and in the long-run? What are the policy implications for the transition economies planning to join the Euro area? Neither the PPP nor the Balassa-Samuelson hypotheses Page 1 of 6

2 can explain the data. Both the reduced form and structural equations of the NATREX model are consistent with the data for Hungary and the Czech Republic. The exchange rate behavior for Poland and Bulgaria also are explained by the NATREX model. Optimal debt and equilibrium exchange rates in a stochastic environment: an overview in Stochastic Optimal Control, International Finance, and Debt Crises Published in print: 2006 Published Online: May 2006 ISBN: eisbn: DOI: / This overview chapter explains the relevance and the contributions of this book to economic theory and policy. The economic theory and mathematics developed in chapters 2 and 3 derive benchmarks for the optimal debt in an environment where both the return on capital and the real rate of interest are stochastic variables. The equilibrium real exchange rate, the subject of chapter 4, is where the real exchange rate is heading. These benchmarks are applied in chapters 5-9 to the euro, the real exchange rate of the transition economies in Eastern Europe, default risks in emerging market countries, the Asian crises, and the United States current account deficits. The Natural Real Exchange Rate of the United States Dollar, and Determinants of Capital Flows in Fundamental Determinants of Exchange Rates Published in print: 1998 Published Online: November 2003 ISBN: eisbn: DOI: / To what extent has the real exchange rate of the US dollar been as stable as is justified by the fundamentals fiscal policy, private saving ratio, productivity, rate of return on investment, real long term rate of interest? What factors can explain the persistent and large deviations from purchasing power parity? How can we calculate whether the US dollar is over or undervalued? What has produced the US current account deficits? How do international financial markets affect the responses of the US economy to internal and external disturbances? Page 2 of 6

3 Dynamics of Crises Giovanni Piersanti in The Macroeconomic Theory of Exchange Rate Crises Published in print: 2012 Published Online: September 2012 ISBN: eisbn: Page 3 of 6 DOI: / acprof:oso/ In order to describe the path followed by major macroeconomic variable around the time of crises, this chapter examines some dynamic models. It thus shows how the dynamic adjustment path of the economy associated with exchange rate based stabilization plan can be linked to currency crisis. How expected changes in future government's policies can affect the timing of attacks. How a run on central bank's foreign reserves can emerge in a context of consistent and flexible policy rules. How policymakers can elude speculative attacks by introducing uncertainty into the speculators' decisions. That the domestic currency often stays overvalued for a long period. That large discrete devaluations occur after the peg is abandoned. That the domestic interest rates tend to rise in the run up to the crisis. That speculative runs often occur in a multi-period context giving rise to alternating phases of tranquillity and distress. That asset price dynamics plays a critical role in triggering a full-blown financial crisis. Are There Thresholds of Current Account Adjustment in the G7? Richard H. Clarida, Manuela Goretti, and Mark P. Taylor chicago/ This chapter addresses the nonlinear models of current account adjustment for the G7 countries. For most of the G7 countries, significant evidence of threshold effects in current account adjustment is observed. Statistically significant increases in exchange rate volatility during current account deficit adjustment regimes for the United States, Japan, and Germany are found. Additionally, it shows that compared to other G7 countries, the United States over the sample exhibited relatively wide thresholds within which current account adjustment is absent and relatively slow speeds of adjustment once these thresholds, especially the deficit threshold, are crossed. The U.S. current account deficit is in part an endogenous, general equilibrium outcome of global financial and macroeconomic integration. Moreover, it identifies a tendency toward G7

4 exchange rate depreciation during current account deficit regimes and exchange rate appreciation during current account surplus regimes. Causes and Lessons of the Mexican Peso Crisis Griffith-Jones Stephany in Short-Term Capital Flows and Economic Crises Published in print: 2001 Published Online: October 2011 ISBN: eisbn: DOI: / acprof:oso/ The Managing Director of the IMF deemed the crisis faced by the Mexican peso in December 1994 as the first major crisis of the 21st century. Analyzing the Mexican peso crisis reveals that it was brought about by several different factors that include the large scale of deficits in the current account, how these deficits were funded by short-term capital inflows, how the Mexican authorities asserted a relatively fixed nominal exchange rate that was seemingly overvalued to reduce inflation, and the outwardly relaxed monetary policy imposed during The causes also include how the government allowed the transformation of a huge part of this debt into dollar-dominated paper, how devaluation was mismanaged, and, lastly, how criminal and political events have emerged during this period. This chapter takes on a chronological approach in analyzing this crisis and concentrates on issues of devaluation and imperfections within the capital market. Current Account Deficits in Industrial Countries: The Bigger They Are, the Harder They Fall? Caroline Freund and Frank Warnock chicago/ 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 Page 4 of 6

5 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. Current Account Reversals: Always a Problem? Muge Adalet and Barry Eichengreen chicago/ This chapter evaluates the frequency, magnitude, and effects of current account reversals in the gold standard era ( ), the interwar period ( ), Bretton Woods ( ), and the post-bretton Woods float ( ). The results confirm that the gold standard era and the years since 1970 differed strikingly from one another: reversals were smaller, less frequent, and less disruptive in the gold standard period. It also shows that the reversals were relatively costly when a large current account deficit had been allowed to emerge and the real exchange rate was allowed to become significantly overvalued in the preceding period. The growth of the current account deficit in the 1880s led from a combination of domestic economic and political factors. Reversals were both less common and smaller in the Bretton Woods and pre-world War I gold standard eras. The Unsustainable U.S. Current Account Position Revisited Maurice Obstfeld and Kenneth Rogoff chicago/ This chapter reveals that when one takes into account the global equilibrium ramifications of an unwinding of the U.S. current account deficit, currently running at nearly 6 percent of gross domestic product (GDP), the potential adjustment of the dollar becomes considerably larger than estimates from previous papers. U.S. current account adjustment entails a larger potential decline in the dollar. It is assumed Page 5 of 6

6 that labor and capital cannot move freely across sectors in the short run. The model indicates that the U.S. nontraded-goods productivity boom could help explain the widening of the U.S. current account deficit. The exchange rate effects may be massive when U.S. current account adjustment comes. Moreover, further deepening of global capital markets may postpone the day of reckoning. Page 6 of 6

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