The Current Account and Macroeconomic Policy: An Econometric Analysis

Abstract

Beginning in late 1982, a huge gap between domestic saving and domestic investment began to develop in the U.S.; and this gap has remained large through 1987. Investment recovered rapidly after the 1981–1982 recession and has remained abnormally high by U.S. standards in the five years since the recession ended. Domestic saving also recovered rapidly after the 1981–1982 recession, but starting in late 1982, saving fell as a ratio to income. Paralleling this saving-investment gap has been the much-discussed U.S. trade deficit. At the same time, trade surpluses and corresponding saving-investment surpluses developed and persisted in Germany and Japan. (See figures 2–1 through 2–4).

Prepared for the conference “The U.S. Trade Deficit—Causes Consequences, and Cures,” Federal Reserve Bank of St. Louis, October 23 and 24, 1987. This research was supported by a grant from the National Science Foundation at the National Bureau of Economic Research. I am grateful to Tam Bayoumi, Jonathan Eaton, Peter Klenow, Paul Lau, Andrew Levin, Ellen McGrattan, Ronald McKinnon, Kenichi Ohno, and Peter Hooper for helpful assistance, discussions, and advice.