Over the past decade the United States has experienced widening current account deficits and a steady deterioration of its net foreign asset position.

• Position: Conferences - Brief Article

Over the past decade the United States has experienced widening current account deficits and a steady deterioration of its net foreign asset position. During the second half of the 1990s, this deterioration was fueled by foreign investment in a booming U.S. stock market. During the first half of the 2000s, this deterioration has been fuelled by foreign purchases of rapidly increasing U.S. government debt. A somewhat surprising aspect of the current debate is that stock market movements and fiscal policy choices have been treated largely as unrelated events. Stock market movements usually are interpreted as reflecting exogenous changes in perceived or real productivity, while budget deficits usually are understood as a mainly political decision. Kraay and Ventura challenge this view and develop two alternative interpretations. Both are based on the notion that a...