Accounting for US current account deficits: an empirical investigation

Abstract

The sources of US current account deficits are investigated using a number of macroeconomic variables and a vector error correction model. The variables are those typically emphasized by the traditional income - expenditure approach and the intertemporal (Ricardian) approach. The results indicate that macroeconomic variables explain the current account reasonably well, and the evidence seems to support the traditional approach where budget deficits and increases in real interest rates and terms of trade are associated with current account deficits.

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