The large US current account deficit has in the recent past dominated both the news and much of the research conducted in the field of international macroeconomics. Although many agree that the deficit presents a challenge different to the external imbalances and indebtedness of Latin America back in the 1980s, a number of policymakers and economists nevertheless regard it as too large. They are particularly worried about the effects of large external deficits on foreign exchange rates, although it is widely acknowledged that the depth of internationally integrated financial markets makes it possible for an individual country to run consistently large current account deficits without risking the stability of its foreign exchange rates.
Those who want to express their concern about current trends continuing speak in terms of 'global imbalances', 'instability' and 'fragility'. Recent research has emphasized the importance of the integratedness of global commodity markets, not financial markets, to the exchange rate effects of current account deficits. This is interesting and important, as the commodity markets are much less globally integrated than the financial markets. The implication here is that the speed of price adjustment is slower in the commodity markets than the financial markets. This difference in the speed of adjustment can potentially be an important risk factor: if international financial markets allow for large differences between income and expenditure in individual countries, they also create a threat of large incipient exchange rate movements, which, in turn, have the potential to generate large, even panic-like movements in international capital flows.
Many people think these threats alone provide sufficient justification for public sector intervention to reduce the US current account deficit. Economists are currently involved in a lively debate over the need for such intervention and also over the appropriate monetary and fiscal policy measures and their relative efficiencies. |