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Discussion of “Current Account Fact and Fiction”

Discussion of “Current Account Fact and Fiction”. Richard H. Clarida Lowell Harriss Professor of Economics Columbia University NBER. Why Does The US Have a Large Current Account Deficit?. No single cause, but several important factors at work Low saving in the US, average investment

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Discussion of “Current Account Fact and Fiction”

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  1. Discussion of “Current Account Fact and Fiction” Richard H. Clarida Lowell Harriss Professor of Economics Columbia University NBER

  2. Why Does The US Have a Large Current Account Deficit? • No single cause, but several important factors at work • Low saving in the US, average investment A negative private S – I balance A budget deficit • Also, a global general equilibrium outcome global saving relative to low invest drives down rates intervention • Because of role of dollar, sound US monetary policy, and deep US capital markets, US destined to run a structural CA deficit of 2 to 3 percent of GDP

  3. http://www.nber.org/books/curracct/obstfeld-rogoff6-20-05.pdfhttp://www.nber.org/books/curracct/obstfeld-rogoff6-20-05.pdf

  4. Adjustment • US foreign liabilities in dollars, so revaluation effects are playing and will play a role, but not sufficient • US has net foreign liability of 3 trillion but still earns more dividends, profits, and interest on 7 trillion of foreign assets than it pays on 10 trillion of foreign liabilities • There do appear to be non-linear threshold effects in G7 current account adjustment, which is why exchange effects may be hard to find

  5. http://www.nber.org/books/curracct/lane-milesiferretti7-11-05.pdfhttp://www.nber.org/books/curracct/lane-milesiferretti7-11-05.pdf

  6. http://www.nber.org/books/curracct/cas05/clarida.pdf

  7. Why I Think the Saving Glut Relative to Investment is part of the Story • If just a US low saving story, we would expect high long term real interest rates, but real long term rates in the US and G7 are low • If just an intervention story, then why would UK real long rates be falling and low? Instead virtually identical to US • If just a budget deficit story, would have had current account surplus in 2000, not a deficit of 4 percent of GDP

  8. http://www.nber.org/books/curracct/lane-milesiferretti7-11-05.pdfhttp://www.nber.org/books/curracct/lane-milesiferretti7-11-05.pdf

  9. How the Saving Glut story fits into this paper • Ratio of household net worth to consumption is very high • Since equity values are below bubble levels, and net foreign liabilities have increased, must be a function in part of home equity values • Savings glut leads to low bond yields which push up real estate values • Low bond yields support equity prices at historically high P/E’s

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