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G7 Current Account ImbalancesSustainability and Adjustment$
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Richard H. Clarida

Print publication date: 2007

Print ISBN-13: 9780226107264

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226107288.001.0001

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The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account

The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account

(p.457) 11 The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account
G7 Current Account Imbalances

Aart Kraay

Jaume Ventura

University of Chicago Press

This chapter reports a novel theoretical model that connects present international imbalances and the bursting of the global equity bubble in 2000. Budget deficits constitute a welfare-improving policy response to the collapse of the bubble. They also constitute a beggar-thy-neighbor policy that is responsible for the collapse of the bubble. The presented model crudely but effectively encapsulates conventional views of the U.S. current account deficit. The U.S. government recognizes the beneficial role that bubbly firms play in the world economy. The appearance of a bubble in the U.S. stock market in the second half of the 1990s explains much of the decline in U.S. net foreign assets. The collapse of the stock market in 2000 was the result of a coordination failure or change in investor sentiment, and the rapid expansion of public debt since then served to displace inefficient investments in the same way that the bubble did.

Keywords:   bubbly firms, economy, U.S. government, U.S. stock market, global equity bubble, net foreign assets, international imbalances, current account deficit

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