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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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Current Account Deficits in Industrial Countries

Current Account Deficits in Industrial Countries

The Bigger They Are, the Harder They Fall?

(p.133) 4 Current Account Deficits in Industrial Countries
G7 Current Account Imbalances

Caroline Freund

Frank Warnock

University of Chicago Press

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 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.

Keywords:   current account adjustment, industrial countries, current account deficit, financing, income growth, fiscal balance, gross domestic product, exchange rate

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