America’s Deficit,
the World’s Problem
Keynote Speech by Maurice Obstfeld

The U.S. deficit in the current account, now running at an annual rateof over US$700 billion, has reached levels (as a percentage of GDP) notseen since the first decades of the 19th century. The deficit is soaking
up roughly three-quarters of the world’s available external surpluses. If
the deficit continues at this pace, the U.S. could ultimately converge toan external debt/GDP ratio around one. Several analyses suggest thata rapid adjustment of the deficit toward balance would require a very
sharp real depreciation of the U.S. dollar. This paper reviews the limitationsof some optimistic arguments that predict instead a “soft landing” forthe dollar. I focus in particular on the view that greater financial
globalization allows the United States easily to run much bigger deficits
for much longer periods. Some simple calculations based on real interest
rate differentials suggest that markets could be underestimating the extent
of necessary dollar depreciation.
Keywords: Current account adjustment; International capital flows;
Exchange rates
JEL Classification: F32

University of California, Berkeley (E-mail: obstfeld@econ.berkeley.edu)
The material herein reflects, in part, collaborative research with Kenneth Rogoff. I am gratefulto the IMF Institute for its hospitality while this paper’s first draft was written, and to the Classof 1958 Chair at the University of California, Berkeley, for research support. Naohiko Baba
graciously assisted me in obtaining some of the data used in this paper.
MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005
DO NOT REPRINT OR REPRODUCE WITHOUT PERMISSION.

25

I. Introduction
As a percentage of GDP, the U.S. current account deficit now stands at a level thathas not been seen since the early decades of the American republic. It was at the
beginning of this period that the first U.S. Treasury Secretary, Alexander Hamilton,sought to establish the new nation’s creditworthiness in European capital markets.
In absolute terms, of course, the deficit is the biggest ever seen in world history,
absorbing a full three-quarters of the world’s available external surpluses—including
those of China, Japan, Germany, and Switzerland.
Is this unprecedented situation a problem for the United States, for other countries,
or for everyone? Opinions vary greatly—as they always seem to do in unprecedented(or at least not recently precedented) situations. I will argue that the U.S. deficit has
indeed become a problem for the United States, and therefore for the world economy
as a whole. Given the need for a substantial global adjustment in expenditure patterns,
it will be a major challenge for monetary and fiscal authorities in the major trading
regions to engineer a “soft landing” for currency values.

II. International Payments Patterns Today
The U.S. deficit is not a new phenomenon. The U.S. current account balance has
been continuously negative since the early 1990s, and was also in deep deficit in the
mid-1980s. Indeed, in retrospect, the period of relatively moderate deficits between
1990 and 1998 now appears as something of an aberration along an otherwise
consistent path of decline starting in the early 1970s, if not before (Figure 1).
Figure 1 U.S. Current Account Balance, 1970–2005

2

Percentage of GDP

1
0
–1
–2
–3
–4
–5
–6
–7
1970 72

74

76

78

80

82

84

86

88

90

92

94

96

98 2000 02

Note: Figure for 2005 is the International Monetary Fund’s April 2005 preliminary
projection.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

26 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 200504

America’s Deficit, the World’s Problem

In the April 2005 edition of itsWorld Economic Outlook, the International Monetary
Fund (IMF) forecast a 2005 U.S. current account deficit of US$725 billion(or 5.8 percent of U.S. GDP). First-quarter estimates show the 2005 U.S. deficit
running at an even higher 6.4 percent of GDP so far. Who will finance this unprecedented
level of borrowing by the world’s economic and military superpower? Japan is expectedto advance nearly 22 percent of the total sum, amounting to US$157 billion or
3.3 percent of its GDP. The euro zone is expected to provide a relatively small amount,
US$50.1 billion (or 0.4 percent of its own GDP). Other advanced countries, taken
together, are predicted to lend somewhat less than Japan, US$136 billion, while newly
industrializing Asia—comprising South Korea, Hong Kong, Taiwan, and Singapore—
looks set to lend US$92 billion (about 6.8 percent of the group’s collective output).
Finally, “other developing countries,” a grouping that includes commodity
exporters currently enjoying enhanced revenues that have risen faster than can bedomestically absorbed, are in line to cover fully 42 percent of the United States’ desired
borrowing, or US$303 billion. This is up from the 37 percent of the U.S. deficit thosecountries financed in 2004, already a very large share. In some of these countries, forexample, Saudi Arabia and Venezuela, political stability looks precarious.
The liquidity and risk structure of U.S. deficit financing would give an emergingmarket finance minister sleepless nights, and would have generated concern even in
the United States during the Bretton Woods era. More than 100 percent of the net
financing from developing countries as a group has recently taken the form of reserve
accumulation. In 2004, for example, developing countries’ net lending to the UnitedStates was about US$246 billion, out of the overall U.S. deficit of US$666 billion.
These same countries, however, accumulated even more dollar reserves in that year—
primarily liquid dollar claims on the U.S. Treasury. The discrepancy in part reflects
U.S. accumulation of gross claims on developing countries, in the form of foreign
direct investment (FDI), for example, and therefore liquidity and risk transformation(in addition to net short-term borrowing) on the part of the United States.
Whereas even the prospect of such developments would once have sent financial
markets reeling, market actors now seem to be accepting the extent and nature of
U.S. borrowing, and the prospect of its indefinite continuation, with equanimity.
The U.S. net external debt has reached 25 percent of GDP, and could rise muchhigher, yet long-term U.S. dollar interest rates show no signs of upward pressure—quite the contrary—and there is no evidence that U.S. financing needs are straining
the willingness of foreigners to absorb into their portfolios additional claims on the
United States. The U.S. Department of Commerce’s preliminary balance of payments
estimates for 2004 show that private foreign investors acquired an additional
US$1.078 trillion in assets located in the United States; foreign private purchases of amere US$666 billion would have sufficed to finance the current account deficit, even
without any foreign official dollar purchases. Of course, U.S. residents simultaneously
acquired more than US$800 billion in foreign-based assets, and foreign central banks
more than US$400 billion in dollars, an illustration of the extreme degree of foreign
leverage that has come to characterize the U.S. external portfolio (as well as those ofother industrial countries). Are there really no risks in sight, or are foreign private andofficial lenders to the United States simply discounting the potential risks very heavily?

27

Leading economists have positioned themselves on both sides of this question.
The next section reviews some of the main arguments in favor of a benign neglect of
the current U.S. external position. I focus on the implications of greater financial
integration, because that is perhaps the most striking way in which the present differsfrom the past. At the same time, I offer some reasons for being skeptical of the casefor complacency.

III. Arguments for Complacency and Their Limitations
Whenever a heretofore unsustainable trend develops and then persists, arguments
emerge as to why the world has changed, so that what once was thought impossible
now is not only possible but necessary. While these arguments generally have someplausibility, their primary purpose is to provide intellectual reassurance in the faceof the grim reality that markets can seem fickle, reversing themselves sharply andunpredictably. While such reversals, I believe, sometimes reflect a true multiplicity
of equilibria, even models with a unique equilibrium can allow long-run policy
inconsistencies to remain largely hidden from view for some time—for example, due
to a fixed exchange rate—before markets erupt in a sudden crisis.1
One prominent argument in favor of a relaxed approach has been advanced byFederal Reserve Board Chairman Alan Greenspan (Greenspan [2004]). In brief, hisview is that world financial markets have become so deep and efficient that for acountry as creditworthy as the United States has been, much larger current accountimbalances are sustainable over longer periods and therefore need not urgently requirepolicy interventions.
It is certainly true that the last 15 years have seen a spectacular growth in several
measures of global financial integration.2 Figure 2 displays, at the global level, thepaths of world foreign assets and liabilities (with liabilities in excess of assets, contrary
to the prediction of accounting identities, as a result of the same statistical problems
that generate a global current account deficit in the available data).3 Global asset
stocks have risen sharply in recent years, and for individual countries the ratios offoreign assets and liabilities to GDP have ballooned. For the United States, foreign
assets are now nearly 75 percent of GDP, while foreign liabilities are nearly 100 percent
of GDP (Figure 3). In effect, the U.S. portfolio is extensively leveraged, with foreign
obligations four times the net external liability and foreign claims three times as big
as the net liability. Since these assets and liabilities differ fundamentally in nature—compared to other countries, the United States is short on debt instruments and longon equity instruments—the gross positions are not offsetting. Instead, they havevery different risk and liquidity characteristics, that is, different payouts in different
possible future states of the world.

1. An example along these lines is Dooley’s (2000) model of emerging market crises driven by moral hazard.
2. For a more detailed discussion taking a long-run historical perspective, see Obstfeld and Taylor (2004).
3. These data are taken from the important work of Lane and Milesi-Ferretti (2005).

28 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

America’s Deficit, the World’s Problem

Figure 2 World Foreign Assets and Liabilities, 1970–2003

140

Percentage of world GDP

120
100
80
60
40
World assets
World liabilities

20
01970 72

74

76

78

80

82

84

86

88

90

92

94

98 2000 02

96

Source: Lane and Milesi-Ferretti (2005).

Figure 3 U.S. Foreign Assets, Foreign Liabilities, and Net Foreign Assets, 1982–2003

Percentage of GDP
90
70
50
Foreign assets
Foreign liabilities
Net foreign assets

30
10
–10
–30
1982

84

86

88

90

92

94

96

98

2000

02

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

29For smaller countries and major financial or banking centers, the numbers areeven more extreme than for the United States (Table 1). Developing countries generally have smaller ratios of gross assets and liabilities to GDP—there is much moreintertemporal trade compared to asset swapping.4 However, even within the group of
developing countries, there are increasing flows of FDI, in particular from middleincome to lower-income countries. Such flows tend to be associated with higher
international leverage in the source countries.
At one level, these mushrooming gross positions are correlated with a welcome
increase in global diversification, the sort of risk-sharing functions highlighted ininternational finance textbooks. At another level, however, the amount of additional
real diversification is surely lower than these numbers imply. The reason is that, intoday’s globalized world of financial engineering, a given monetary investment may
pass through any number of financial intermediaries in different countries before theinitial investor and the ultimate risky asset are matched.
The implications of all this for the U.S. current account cut two ways. On the
one hand, global capital markets may indeed be more forgiving than in the past,
allowing the United States to adjust gradually toward a significantly smaller external
deficit even after it has incurred a net foreign debt much larger than today’s. This is
the “soft landing” scenario: the United States has plenty of time to adjust later on,
and the markets will happily provide it, minimizing the sharp and disruptive priceeffects that a more abrupt reversal would cause.
On closer examination, however, one might conclude that market behavior is likely
to be conditioned by an assessment of the probability of some sort of “hard landing”—
and that this probability depends more on the extent of goods market than of asset
market integration. Goods markets remain far less integrated internationally than asset
markets, implying that big changes in expenditure patterns—such as might accompany
a sharp drop in the U.S. external deficit—would result in large exchange rate
movements. Obstfeld and Rogoff (2005) have estimated that a global adjustment of
the U.S., Asian, and European current accounts to balance could result in nearly a
30 percent fall in the dollar against the euro, and a 35 percent fall against an aggregate
Table 1 International Investment Positions of Selected OECD Countries, 2003
Ratio to GDP
CanadaFranceGermany
Italy
Japan
United Kingdom

Assets
0.75
1.79
1.48
0.95
0.87
3.26

Liabilities
0.93
1.72
1.41
1.00
0.48
3.29

Net position
–0.18
0.07
0.06
–0.05
0.39
–0.02

United States
Switzerland
Euro area

0.71
5.03
1.07

0.96
3.67
1.18

–0.24
1.35
–0.10

Source: International Monetary Fund, International Financial Statistics.
4. This contrast is discussed more fully in Obstfeld (2004).

30 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

America’s Deficit, the World’s Problem

Asian currency basket. Importantly, this result has very little to do with the degree of
asset market integration, which itself feeds into the degree of depreciation needed fora given current account change in a relatively secondary way. Taking realistic pricestickiness and exporters’ pricing-to-market into account would magnify these estimates.
These considerations suggest a second, less benign implication of globalized financial markets. The prospect of large exchange rate changes raises the prospect of large
capital gains and losses on leveraged international positions which (as we have seen)
have now become very large. The longer the U.S. deficit continues, and the larger it
gets, the larger also is the overhang of potential dollar depreciation. Thus, the larger
is the potential also for an abrupt reversal of market sentiment—similar to what
various emerging markets have experienced many times in recent years. In effect, thefluid international capital market may be extending to the United States, at low
interest rates, a longer rope from which to hang later on.
The complex chains of counterparty obligation that have arisen in the global
economy, typically involving hedge funds and other nonbanks and impossible to
track by any national regulator, raise a serious systemic threat. It is made worse by
the market’s knowledge that, at some stage, a precipitous dollar fall could occur. This
creates the possibility of a sudden and extensive market movement to unload dollar
assets, as in a variant of the asymmetric information setup that Morris and Shin(1998) applied to speculative attacks on fixed exchange rates. The systemic threatraised by Long-Term Capital Management’s difficulties in 1998 could pale comparedwith what is possible now.
There are, of course, other arguments for complacency besides the reliance on greater
financial integration. Another is that the world is awash in savings, and the United Statesis the best place to invest them. The United States has no choice but to accommodate
these investment inflows by running a large current account deficit. Any attempt toraise U.S. saving, in these circumstances, would have a globally deflationary effect.
This theory of the U.S. deficit runs afoul of the timing of events. According to the
IMF, gross world saving declined somewhat between 1997 and 2002, while the U.S.
deficit swelled from 1.6 to 4.5 percent of GDP (Table 2). In 2003, world saving indeed
Table 2 U.S. Current Account Deficit, Gross World Saving, and the Price of Oil

1997
98
99
2000
01
02
03
04

U.S. current account balance(percentage of GDP)
–1.6
–2.4
–3.2
–4.2
–3.8
–4.5
–4.8
–5.7

World saving(percentage of world GDP)
24.0
23.0
23.2
23.9
23.2
23.1
23.9
24.9

Oil price(US$/barrel)
19.27
13.08
17.98
28.24
24.33
24.95
28.89
37.76

Note: The world saving measure is the weighted average of national gross saving rates, wherecountry weights are the share of purchasing power parity (PPP)-adjusted GDP in world
PPP-adjusted GDP.
Source: International Monetary Fund, World Economic Outlook (various issues).

31

jumped back up to roughly its 1997 level, and rose by another percentage point ofworld GDP in 2004 as the U.S. external balance worsened by nearly 1 percentage
point of U.S. GDP. Thus, most of the U.S. deficit cannot obviously be attributed
to higher world savings.
As for the source of higher world saving, much originates in the emerging market
economies. One important driving factor is the recent sharp run-up in world oil
prices (Table 2), which has, in the short run, augmented the savings of oil producing
countries such as Venezuela, Nigeria, a number of Middle Eastern nations, and theCommonwealth of Independent States.5 A similar impetus has come from rapid
increases in nonfuel commodity prices in 2003 and especially 2004. At the sametime, the U.S. real interest rate, as measured by the inflation-indexed 10-year
Treasury yield, dropped by about 100 basis points between 2002 and 2004, and inJune 2005 stood at around 1.6 to 1.7 percent per annum. (The indexed bond rate
was roughly 4 percent in 1999–2000.) The very recent behavior of the rate could well
be associated with higher world saving, though declining perceptions of investment
profitability compared with 1999–2000 may also be a factor. When global investment
demand does recover, as it surely will, there will be more attractive opportunities
outside the United States, and the United States, as a major international debtor,
will suffer as world interest rates rise. Recent commodity price increases will also bereversed, helping primary-product importers but possibly placing additional upward
pressure on world real interest rates (and once again hammering indebted emerging
markets through the effect described by Triffin [1968]).
In any case, higher foreign demand for U.S. assets bears at best an indirect
relationship to the U.S. saving-investment balance. Foreigners can invest in the
United States without its running an external deficit, provided Americans are willingto acquire foreign assets—which they have been, given the much higher return they
have earned on those assets historically compared to the rather meager payout on
U.S. obligations to foreigners ! 6
What about the prominent “revived Bretton Woods” model advanced by Dooley,
Folkerts-Landau, and Garber (2003)? The emergence of China as a global economic
power, they claim, has changed everything. China’s interest is to peg the renminbi
and accumulate U.S. dollar reserves, thereby drawing excess labor out of the countryside into manufacturing, while attracting the advanced-country FDI on which its
ongoing industrialization depends. Because this arrangement is incentive-compatible
for both China and the United States, it can continue for five, 10, or perhaps even 20
more years.
This argument, too, appears overdrawn. Why must the United States run a deficit
for China to accomplish its goals? What of the position of Japan, which is an evenbigger holder of U.S. dollar reserves than China but faces very different policy
imperatives? Will China be able to withstand the threat of U.S. protection, which has
already induced it to tax textile exports, or the internal price pressure due to continuing
5. Some commentators ascribed the low U.S. real interest rates of the latter 1970s to a transfer of world income infavor of oil producing economies with relatively high short-run marginal propensities to save.
6. Obstfeld and Rogoff (2005) estimate that since the early 1980s the United States has on average earned 3.1 percent
more per year on its foreign assets than it has paid on its foreign liabilities, taking account of the capital gains
associated with exchange rate and asset price fluctuations.

32 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

America’s Deficit, the World’s Problem

speculative capital inflows? And if the current configuration is so stable, why did China
introduce limited foreign exchange trading in May 2005 (for external currencies),
and why did Hong Kong in the same month widen its fluctuation band against the
U.S. dollar?7
Most importantly, perhaps, China’s participation in a “revived Bretton Woods”
arrangement is neither necessary nor sufficient to allow the United States to runlarge external deficits indefinitely. So we are back to the worrisome but unansweredquestions about U.S. adjustment. How abruptly might it occur, when, and with what
economic consequences for the United States and the world?

IV. What Are the Markets Thinking?
If the preceding analysis is correct, and if a resolution of global imbalances is necessary and may require extensive U.S. dollar depreciation, why has the dollar not
depreciated more sharply already? One possible way to approach the question is to
redo a calculation that Krugman (1985) proposed two decades ago to assess thedollar’s sustainability at its then stratospheric exchange rate against major foreign
currencies. If the possibility of sharp dollar depreciation is not reflected in asset prices
and yields, we can conclude that the market is optimistic about a soft landing
outcome—perhaps excessively so.
The Krugman calculation makes the assumption (not an innocuous one) thatinterest parity holds for long-horizon instruments. The implication of interest parity
is that the real interest differential in favor of the United States should equal the
expected real depreciation of the dollar against foreign currencies. Krugman (1985)
examined the resulting implicit forecast of the real dollar’s path and concluded that
it would imply an implausibly (if not impossibly) high level of foreign debt accumulation by the United States. On that basis, he argued that markets were simply inerror—the dollar would have to depreciate precipitously once markets understood
the long-term implications of the dollar’s high exchange rate. That, of course, is what
subsequently happened.
Twenty years later, U.S. net foreign debt levels that Krugman considered wildly
implausible (for example, 50 percent of U.S. GDP) are already coming into view.
The current low level of U.S. real interest rates, however, makes the configuration ofmarket prices today arguably even more incongruous than it was when Krugman
wrote his paper. Let us look at the data, recognizing that nowadays we have an
important advantage over Krugman: the existence of inflation-indexed government
debt instruments in the United States, Japan, and the euro zone allows us to observelong-term real rates of interest directly.8
7. Of course, China has now carried out (as of July 21, 2005) a slight revaluation of its currency, and is exploiting to alimited degree the flexibility afforded by its narrow band against the dollar. Changes that will occur in the future remain
to be seen.
8. Krugman (1985) took as a crude proxy the long-term nominal interest rate less current inflation. That measure, applied
today, comes tolerably close to the inflation-indexed rates for the United States and Europe. For Japan, however,the 10-year indexed-bond return is much lower than the corresponding real return, when the latter is estimated as
the nominal bond rate less current inflation. This suggests a market expectation that over the next decade Japan’s

33

Table 3 Returns and Differentials on Inflation-Indexed Government Bonds,
June 6, 2005
Percent per annum(1)
U.S. 10-year
1.57

(2)
Japan 10-year
0.35(1) – (2)
1.22

(3)
U.S. 30-year
1.68

(4)
France 30-year
1.56(3) – (4)0.12

Sources: Global Financial Data; Bloomberg.

Table 3 shows that for 10-year bonds, and assuming interest parity, markets
expect the U.S. dollar to depreciate in real terms against the yen at an average rate of
1.22 percent per year over the next decade. Expected real dollar depreciation against
the euro is much smaller—essentially the expectation is of no change. Given the priceelasticities generally estimated in the literature, neither of these real exchange ratepaths will allow the United States substantially to reduce its current account deficit orJapan substantially to reduce its surplus. Only if longer-run elasticities are far above
short-run estimates could the implied price changes be consistent with current
account adjustment over a long horizon. Suppose, for example, that the implied realdepreciation of the dollar were consistent with a reduction in the U.S. current accountdeficit to 4.5 percent of GDP, while nominal U.S. GDP grew at a rate of 6 percent
per year. Then the forecast must be that the U.S. net foreign debt will stabilize at
75 percent of GDP, three times its current level. One might well conclude that, atthe present time, markets are excessively optimistic about a protracted “soft landing”
for the dollar and about the dollar’s future real value.

V. Conclusion
In June 2004, Republicans in the U.S. Congress floated a proposal to replace Alexander
Hamilton’s portrait on the US$10 note with that of recently deceased President Ronald
Reagan. This proposal looks ironic in view of the current U.S. macroeconomic andgeopolitical impasse. Having witnessed firsthand the Continental Army’s near-defeat
by Great Britain as a result of scanty financial resources, Hamilton well understoodthat military muscle depends, first and foremost, on financial muscle. As Treasury
Secretary, his first priorities therefore were to establish U.S. credit abroad and solidify
the central government’s power to levy taxes. For these (and other) reasons, he has
deservedly occupied the US$10 bill since 1929.9
Reagan, in contrast, presided over sweeping tax cuts and sharp deteriorations in
the U.S. federal and external accounts. To his credit, however, he eventually recognized
the dangers posed by these imbalances and agreed to deficit-reducing tax increases.
These measures, in turn, helped bring about the rather benign U.S. current accountand dollar adjustment of the late 1980s (Figure 1).
inflation will rise from its current rate of just under zero to something approaching 1 percent per year. The indexed
euro instrument that I consider, issued by France, is indexed to the harmonized euro zone consumer price index (CPI)
excluding tobacco.
9. Chernow (2004) offers a comprehensive recent account of Hamilton’s extraordinary life and accomplishments.
A more concise summary focusing on Hamilton’s contributions to the U.S. fiscal and financial system is in Bryan,
Champ, and Ransom (2000).

34 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

America’s Deficit, the World’s Problem

The United States is once again running high fiscal deficits, and its current
account financing needs dwarf those of the Reagan era. The world looks increasingly
dangerous, yet the United States’ foreign military commitments already outstrip thecurrent capacities of its armed forces. Tax increases are a political nonstarter; indeed,
there is even pressure to expand the federal debt sharply to fund private retirement
accounts as part of Social Security reform. And of course, even if the United States
were to solve its own problem of reconciling its internal and external balances,
Europe and Japan would likely face unwelcome deflationary pressures.
The situation looks unsustainable—but how will it end, and when? Someobservers, including myself, are acutely uncomfortable. We favor U.S. policy actions,such as federal deficit reduction, likely to reduce U.S. net foreign borrowing (as wellas additional monetary stimulus in Europe and Japan). What would Hamilton think?
We can easily guess. To paraphrase another U.S. president, Gerald Ford, if Alexander
Hamilton were alive today, he would be turning over in his grave.

References

Bryan, Michael, Bruce Champ, and Jennifer Ransom, “Who Is That Guy on the $10 Bill?” Economic
Commentary, Federal Reserve Bank of Cleveland, June, 2000.
Chernow, Ron, Alexander Hamilton, New York: Penguin Press, 2004.
Dooley, Michael P., “A Model of Crises in Emerging Markets,” Economic Journal, 110 (460), 2000,
pp. 256–272.
———, David Folkerts-Landau, and Peter M. Garber, “An Essay on the Revived Bretton Woods
System,” NBER Working Paper No. 9971, National Bureau of Economic Research, 2003.
Greenspan, Alan, “The Evolving U.S. Payments Imbalance and Its Impact on Europe and the Rest of
the World,” Cato Journal, 24 (1–2), 2004, pp. 1–11.
Krugman, Paul, “Is the Strong Dollar Sustainable?” in The U.S. Dollar—Recent Developments, Outlook,and Policy Options, Kansas City, Missouri: Federal Reserve Bank of Kansas City, 1985,
pp. 103–132.
Lane, Philip R., and Gian-Maria Milesi-Ferretti, “The External Wealth of Nations: Mark II,” manuscript,
Trinity College, Dublin, and International Monetary Fund, 2005.
Morris, Stephen, and Hyun Song Shin, “Unique Equilibrium in a Model of Self-Fulfilling Currency
Attacks,” American Economic Review, 88 (3), 1998, pp. 587–597.
Obstfeld, Maurice, “External Adjustment,” Review of World Economics, 140 (4), 2004, pp. 541–568.
———, and Kenneth Rogoff, “Global Current Account Imbalances and Exchange Rate Adjustments,”
Brookings Papers on Economic Activity, 1, 2005, pp. 67–146.
———, and Alan M. Taylor, Global Capital Markets: Integration, Crisis, and Growth, Cambridge:
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House, 1968.

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36 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005