Harald Hau, Hélène Rey, 01 September 2008

The sustainability of the US current account depends on foreigners’ willingness to holding US assets. This column discusses new micro-econometric evidence that equity funds rebalance in reaction to increased exchange rate risk. In short, there is a limit to foreigners’ holding of US assets; the US will either have to run a trade surplus in the future, or the dollar must fall to deflate the value of foreigner’s holdings.

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