There are a number of worrisome features of the U.S. current account deficit.

• Position: Conferences - Brief Article

There are a number of worrisome features of the U.S. current account deficit. In particular, its size and persistence, the extent to which it is financing consumption as opposed to investment, and the reliance on debt inflows raise concerns about the likelihood of a sharp adjustment. Freund and Warnock examine episodes of current account adjustment in industrial countries to assess the validity of these concerns. They find that: 1) larger deficits take longer to adjust and are associated with significantly slower income growth (relative to trend) during the current account recovery than smaller deficits; 2) neither persistent deficits nor large net foreign debt positions are accommodated by more extensive exchange rate adjustment or slower growth...