Obstfeld and Rogoff show that when one takes into account the global equilibrium ramifications of an unwinding of the U.S. current account deficit, currently running at nearly 6 percent of GDP, the potential collapse of the dollar becomes considerably larger (more than 50 percent larger) than in their previous estimates.

• Position: Conferences - Gross domestic product - Brief Article

Obstfeld and Rogoff show that when one takes into account the global equilibrium ramifications of an unwinding of the U.S. current account deficit, currently running at nearly 6 percent of GDP, the potential collapse of the dollar becomes considerably larger (more than 50 percent larger) than in their previous estimates. It is true that global capital market deepening appears to have accelerated over the past decade and that this deepening may have helped the United States to allow a record-breaking string of deficits. Unfortunately, though, global capital market deepening turns out to be of only modest help in mitigating the dollar decline that almost inevitably will occur in the wake of global current account adjustment. As their earlier analysis showed, and the model of this paper reinforces, adjustments to large...