The US current account,sustainability, and the international monetary system

In this paper, we examine the sources of the US current account imbalances and discuss the role of the international monetary system in enabling the US in carrying such external deficits. There is evidence that the stochastic properties of the US current account are not compatible with the intertemporal national budget constraint. We argue that this is likely to be related to the dominant role of the U.S. dollar as an international reserve asset, which allows the US to meet international demand for safe assets and allows borrowing at very low interest rates. Results from a structural VAR model indicate that temporary shocks dominate the current account in the short run, whereas domestic permanent supply shocks and preference shocks contribute significantly to US current account movements in the long run. To the extent that temporary shocks stem from aggregate demand, stabilizing aggregate demand is important in achieving long-term sustainability in the current account. Finally, the paper discusses the role of the international financial system and the international role of the U.S. dollar in contributing to US external imbalances.