ABSTRACT
As the US current account deficit has climbed beyond all previous historical records, both concerns about the implications of this development and debates about possible remedies have intensified in academic and policy circles. References to the risks emanating from ‘global imbalances’ – which has become the politically correct synonym for the US current account deficit – have become a standard health warning accompanying most economic forecasts, and foreign exchange markets have repeatedly had the jitters. After a brief debate in late 2004, however, the excitement has been in vain: economic polices have barely changed and perceptions of the importance of the problem seem to be declining. In fact, the discussion has become largely politicized, with different consensus in the different geographical areas: the ‘Washington consensus’ that blames China, the ‘European consensus’ that blames the US fiscal deficit and the Fed’s loose monetary policy, and the ‘Asian consensus’ that sees the accumulation of foreign exchange reserves as an integral component of their managed float exchange rate system. The side effect of this polarization is the lack of a deep analysis of the problem, as the large majority of studies are intended to pursue a specific agenda.
