Can International Productivity Differences Explain U.S. Current Account Deficits?

Abstract

An influential explanation for the recent rise in the U.S. current account deficit is the boom in U.S. productivity. As U.S. productivity surged in the mid-1990s, capital was attracted to the U.S. to take advantage of the higher real returns. Using a two country general equilibrium model, this paper quantitatively shows that the gap in productivity growth between the U.S. and the of the world cannot explain the U.S. current account deficits, especially in the 1980s and the 2000s. This is because on a GDP-weighted basis, the of the world actually had higher productivity growth during these periods, and standard macroeconomic models would predict an outflow of funds from the U.S. to the rest of the world, and a consequent U.S. current account surplus. We show that changes in global financial integration can help explain this anomaly in U.S. current account behavior.