On Current Account Surpluses and the Correction of Global Imbalances”, Paper presented at the Central Bank of Chile Research Conference

The United States has run an increasingly large current account deficit over the last few years. J. P. Morgan forecasts that in 2007 the deficit will reach almost one trillion dollars, or 7 percent of GDP. This unprecedented situation has generated concern among analysts and policymakers. Many argue that this deficit is unsustainable and that, at some point, it will have to decline. Much of the recent research on the issue examines whether the U.S. external adjustment will be gradual or abrupt, and how it will affect the (real) value of the dollar.1 Of course, one country’s current deficit must be another country, or countries, surplus. Any discussion of the decline of the U.S. deficit therefore implies a discussion of the reduction of the rest of the world’s combined current account surpluses. Federal Reserve Chairman Ben Bernanke made this point forcefully in a March 2005 speech—before he became Chairman—in which he argued that the main cause of the U.S. external deficit was a major “savings glut” in the rest of the world. Bernanke’s words generated significant 1. See, for example, recent papers published in the 2005(1) issue of Brooking