ECO365H1 Lecture 5: Lecture 5 US Current Account Deficit
Document Summary
Model is good at predicting qualitative changes in current account. When model says current account balance will increase, increases in real life. Does not reflect magnitude of increase/decrease in current account. Increasing the exchange rate to balance the us current account. We want to increase the exchange rate so that the current account deficit equals zero. By increasing the exchange rate, we increase net exports which will balance the current account. Prediction in early 2000s by rogoff and obstfeld was we needed the exchange rate to appreciate by 30% to. Newer research shows this prediction is too high due to valuation effects. We need to understand the foreign assets and liabilities of us. 70% of foreign assets are in a foreign currency. Value of foreign assets increases in terms of usd. Exchange rate appreciation is overall capital gain which increases rate of return on portfolio. This increases net factor payments to us which increases current account balance.
