On The Causes Of The U.s. Current Account Deficit And Sustainability

In 2006, the US current account deficit amounts to unprecedented 6.2% of its GDP. From the real economy perspective, it can be reflected by the large trade deficit; while from the financial investment perspective, it has manifested by the consecutive capital inflow and the US's currently NO.1 external debt position in the world.Based on the inter-temporal share model developed by Engel and Rogers (2006), the article introduces three variables: the difference between US and world productivity, the return on US investment abroad and that of foreign investment in the US, and uses a VEC model to simulate the expected stable US GDP share. Based on the VEC stimulation, the article then conducts a regression using the inter-temporal share model, and found the following results:First, the deterioration of the current account can be largely explained by the fact that the expected stable GDP share has systematically exceeded the real GDP share, and this in term has two sources: on the real economy perspective, this is because of the faster US productivity growth over its world counterparts, on the financial investment level, this results from the positive return gap between US investment abroad and foreign investment in US.Second, although the US current account has maintained "blade equilibrium" in the short run, it has been proved, both by inter-temporal theory and the current economic and financial variables, that the US current deficit is unsustainable; and the sub-prime crisis has provided an opportunity for the adjustment to happen.Third, compared with instant asset price adjustment, the adjustment in the real economy level is more in line with the long term benefit of the world economy. In any circumstance, the adjustment will always be painful, and rather than forcing one economy to bare the full cost, it must be shared through global cooperation...