Current accounts deficits are driven by different variables, with a trade deficit being a major component. In this video, Kristin Forbes outlines a model to understand when deficits are worrying. When countries run current account deficits, we need to go beyond trade deficits and focus on financial channels and vulnerabilities. Deficits can be risky, but can also be risk-sharing. This video was recorded in March 2016 during the Royal Economic Society’s Annual Conference held at the University of Sussex.
Kristin Forbes, 16 May 2016
Douglas Campbell, 15 April 2014
The secular stagnation hypothesis is back. Several prominent economists claim that the US may have entered a prolonged period of anaemic economic growth caused by weak aggregate demand. This column argues that the build-up of trade deficits caused by the appreciation of the dollar can explain most of the decline in manufacturing employment, output and investment in the US. Aggressive monetary policy targeted at increasing inflation could help by effectively taxing the inflow of foreign reserves, thereby leading to a depreciation of the dollar.
Peter Schott, 27 November 2009
If the current “shock” to US trade is similar to previous ones, most of the decline in exports and imports stems from a decline in sales of previously exported goods rather than a decline in the number of products exported. To the extent that is true, trade will bounce back relatively quickly once conditions improve. The alternative view is that the severe credit crunch produced a higher-than-usual share of harder-to-reverse firm exits – potentially dampening the speed of recovery. Even if this did occur, history suggests that it will be concentrated amongst small firms which account for only a small fraction of US exports; US multinationals dominate US trade and these firms have the wherewithal to weather the credit crunch. Should the dollar continue to decline, US firms will broaden the range of products exported and the range of markets reached, putting further downward pressure on the trade deficit.